Stock Analysis & Ideas

Opendoor Technologies: Strong Growth Potential, Positioning

I am bullish on Opendoor (OPEN) as it has very strong growth potential, general Wall Street analyst bullishness, competitive positioning within its industry, and could generate massive returns based on analyst projections relative to the current valuation.

Opendoor operates as a real estate marketplace. It was established in 2014 by Keith Rabois and CEO Eric Wu. The entrepreneurs appointed Ian Wong and JD Ross as co-founders to expand the managerial capabilities of this ambitious company.  Opendoor headquarters are based in San Francisco. 

Initial transactions started in Phoenix, U.S., after purchasing and selling multiple homes. These successful exchanges resulted in an estimated 2% control of all purchases in Phoenix by 2016.

Since then, the business operations have been extended to an estimated 44 real estate markets across the country. The expansion resulted in a few changes. For instance, the open houses switched from a 24-hours operation to an evening event from 6-9 p.m..

In addition, the company increased security in the homes they currently own by installing motion sensors.

OPEN Stock Strong Growth Momentum

OPEN reported the successful delivery of $3.8 billion of revenue in Q4 2021 with a promising 1,435% growth year-over-year. The home acquisition rates were more or less equal to Q3 scores, but annual comparisons show a 13x upward growth between home acquisitions at the end of 2021 and 2020.

Likewise, adjusted annual GAAP depicts positive results with an uptick of 9.1% of revenue generation through $730 million gross profits. Moreover, the contribution profit revenue reached $525 million, resulting in a 377% year-over-year growth.

OPEN is likely to continue to generate strong growth momentum thanks to its high-performing resale system in place.

Wall Street’s Take

According to Wall Street analysts, OPEN earns a Moderate Buy analyst consensus based on five Buy ratings, one Hold Rating, and one Sell rating in the past three months. Additionally, the average Opendoor price target of $17.50 puts the upside potential at 126.4%.

Is OPEN Stock Undervalued?

OPEN stock is very challenging to value due to the simple fact that it is not yet profitable and has a massive growth runway.

It trades at a lofty 143x multiple on an EV/EBITDA basis, but there are other metrics that imply OPEN could be undervalued.

For example, it trades at a 0.25x price-to-forward sales multiple, so the threshold for profit margins is quite low for OPEN to generate attractive returns.

On top of that, EBITDA is expected to soar beyond 2022. Between 2023 and 2026, EBITDA is expected to grow at a whopping 91.2% CAGR on the back of EBITDA margin expansion from 0.9% to 61.4%. This will largely be driven by economies of scale, with revenue expected to grow at a 18.4% CAGR over that span.

Meanwhile, normalized earnings per share are expected to expand from -$0.22 in 2023 to $1.26 in 2026. With shares currently trading at $7.73, the upside could be incredible over the next 4-5 years if OPEN can deliver on analyst forecasts.

Considering that OPEN is expected to still have enormous growth momentum in 2026 (analysts currently forecast 116% year-over-year EPS growth in 2026), assigning a 30x P/E multiple on the 2026 estimated earnings is very conservative.

That alone would make OPEN a 6x investment over the next half decade, equating to a CAGR north of 40% over that span.

Summary and Conclusion

OPEN stock is boosted by a rapidly growing business and, with the recent departure of Zillow from the house-flipping industry, it should enjoy even further headway with less competition in this space.

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