Back in September, real estate tech company Opendoor (NASDAQ: OPEN) announced it was going public via a merger with Social Capital Hedosophia II, a special-purpose acquisition company, or SPAC, run by Chamath Palihapitiya.
Well, now the merger has been finalized. Opendoor Technologies is officially a stand-alone public company, trading under the ticker symbol "OPEN" on the Nasdaq stock market. Opendoor raised about $1 billion from the transaction, which it plans to use to fuel growth and expand its market share.
Now that its IPO is complete, should investors consider Opendoor for their portfolio?
What Opendoor does
Opendoor is an iBuyer. This means that instead of customers having to list and sell their homes to a private homebuyer, Opendoor buys homes directly from homeowners and aims to sell them directly to sellers (at a profit, of course).
To be sure, Opendoor isn't the only company in this space, nor is it the largest. Zillow (NYSE: Z) (NYSE: ZG) and Redfin (NASDAQ: RDFN) also have their own iBuyer programs (Zillow's is quite large). But Opendoor is only focused on iBuying. (The company does have some traditional brokerage services, but iBuying is the core business.)
Opendoor aims to grow its operation throughout the United States and wants to be a "one-stop shop to buy and sell a home." The company wants to eliminate consumer pain points when selling -- specifically, how long it takes. Customers can get immediate all-cash offers on their homes through Opendoor and can close whenever they're ready: no showings, no open houses, no staging, etc.
It's not a cheap stock, and profits could be elusive
To be clear, the market opportunity is huge. Roughly 6 million homes were sold in the United States in 2019 alone, implying a market size of about $2 trillion based on the current average existing home sale price. In all, residential real estate in the U.S. is estimated to be a $20 trillion market.
Since its inception, more than 700,000 all-cash offers have been requested on Opendoor's platform. The company did about $4.7 billion in revenue in 2019. It sold nearly 19,000 homes. However, the company's adjusted EBITDA was a net loss of $218 million, which implies that Opendoor lost about $11,500 per house.
To be sure, some of the loss is due to Opendoor reinvesting in the growth of its business -- revenue grew by 161% year over year in 2019 -- but still, Opendoor isn't a profitable company.
This is the main concern, from an investor's perspective. It's not a question of whether the market opportunity is massive (it is) or if there's demand for a way to quickly and painlessly buy and sell houses (there is). It's a question of whether it can be done profitably at scale. None of the major iBuyers have figured out how to make money yet.
What's more, Opendoor is an expensive stock. It currently has a market capitalization of about $18 billion. That's about four times revenue in a business that has no proven examples of being profitable at scale.
To be clear, Opendoor doesn't need a big margin or a huge market share to justify its current valuation. If it grows to just 2% of the U.S. housing market and makes a $5,000 profit per house, it would translate to about $600 million in annual profit. And that's not including revenue for its brokerage services.
The Millionacres bottom line
If Opendoor is able to successfully scale its iBuying business -- and can figure out how to do so profitably -- there's no question that this is a massive market opportunity. However, at this point these are big "ifs," and this isn't a cheap stock by any definition of the term.
If you're looking for a speculative play with tremendous reward potential and have a high risk tolerance and long time horizon, Opendoor could be worth a look.