Opendoor has more than doubled the number of metro markets in which it operates, to more than 50, since 2021.
Courtesy of OpenDoor
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When
Zillow Group
abandoned its online buying of homes in November, investors walked. Zillow’s exit, however, also knocked half off the stocks of
Offerpad Solutions
,
two pioneers of the use of algorithms to buy homes—so-called iBuying. We wrote then that at $15, Opendoor shares were a reasonable bet on more home sellers accepting Opendoor’s instant online offers.
We were overly optimistic—at least about the stock. By this past week, Opendoor (ticker: OPEN) had sunk to $4.50 under the weight of a bear market, rising mortgage rates, and slowing home sales. But we remain sanguine about its prospects.
At the current price, Opendoor is valued at around $3 billion, which isn’t much more than the cash on its balance sheet, or alternatively, its book value. By turning over its inventory of homes roughly once a quarter, the company has reliably produced a per-home profit of around 5%. After years of start-up losses, it now makes operating profits and had its first net profit this year.
Analysts surveyed by FactSet expect Opendoor to generate over $400 million in earnings before interest, taxes, depreciation, and amortization, or Ebitda, plus stock compensation, on sales of about $18 billion this year. Since the start of 2021, Opendoor has more than doubled the number of metro markets in which it operates, to more than 50. Continued expansion should lift sales to near $26 billion and Ebitda to $675 million by 2024, says J.P. Morgan’s Dae Lee, who launched coverage on Thursday with a Buy rating and a $9 target.
Opendoor President Andrew Low Ah Kee says the company can reasonably aspire to a 4% share in 100 housing markets, which would bring revenue to $50 billion. Lenders have backed that expansion with nonrecourse loans secured by the company’s housing inventory.
Home sellers had it good the past few years, as prices rapidly appreciated. Opendoor, which went public in late 2020, and its peers benefited, too. But price appreciation has slowed, and Opendoor now faces questions about whether its computer-calculated home pricing can succeed without a rising housing market.
Opendoor says its pricing models have performed better every year. Along with the multiple-listing databases analyzed by all real estate agents, the company has data from its own activities involving millions of homes. Computer models inform each step of the resale process, from price setting to evaluating offers. Traditional real estate agents pride themselves on their subjective judgment, but Opendoor’s portfolio managers benefit from a systematic discipline.
Opendoor Chief Investment Officer Daniel Morillo says that a recession will slow transaction volume. But, he says, through a dozen slowdowns in the past 50 years, the average U.S. home only dropped in price a few years after the 2008 financial crisis—and then, by just 3%, in the worst quarter. Consumer debt levels and the supply of homes are different now.
Investors have lost patience with growing businesses that aren’t yet profitable. J.P. Morgan’s Lee expects Opendoor to show about 15 cents a share in profits this year (excluding noncash costs like stock options), rising above 40 cents in 2024.
Write to Bill Alpert at william.alpert@barrons.com