Thursday Deep Dive: Opendoor
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For our Deep Dive episode this week the three of us discussed Opendoor, the iBuying company going public in a merger through a SPAC with Social Capital. Opendoor is attempting to reinvent buying and selling a home. The site offers an on-demand, digital-first experience that is supposed to save everyone time and money. The process starts with sellers, who can quickly sell to Opendoor in an all-cash deal to get liquidity, saving a ton of time and effort compared to the traditional listing process. Buyers can tour any homes owned by Opendoor and can buy straight from the app.
First, let’s discuss the SPAC since that is how Opendoor is going public. IPOB is the ticker for the holding company that will be acquiring shares in Opendoor once the deal goes through. It was built by Social Capital and Chamath Palihapitiya for the sole purpose of merging with a private company and taking them public. The deal was announced on September 15th and values Opendoor at an enterprise value of $4.8 billion based on the $10.00 strike price.
Eric Wu (CEO) and Ian Wong (CTO) co-founded Opendoor in 2014. Keith Rabois at Khosla Ventures apparently came up with the idea and then went to Wu and told him to start the company. With top VC dollars backing the company, it has been able to grow rapidly ever since, almost hitting $5 billion in revenue in 2019.
Industry and Competition
Everyone knows real estate is a gigantic market, worth over $10 trillion. Opendoor is focused on the residential market, and specifically the costs associated with completing transactions between buyers and sellers. The brokerage commissions business — the market Opendoor is currently going after — is estimated to be $164 billion but in decline, mainly due to the pressure put on by these iBuying companies. So while it is a large market opportunity, the more Opendoor eats into it the smaller it will likely become.
Opendoor has many competitors, with Zillow and Redfin being two of the largest. Everyone knows Zillow for its online real estate marketplace and Zestimates, but they just started entering the iBuying space with an Opendoor copycat. The company hopes to leverage the billions of visits to its site to gain a competitive advantage in iBuying. Redfin is a “real estate disruptor,” but has gone with a more traditional path. The company employs local agents to give home tours but aims to lower costs and increase efficiencies with a digital-first approach.
There is a lot of capital flowing into iBuying right now. Each of these companies is trying to figure out the best way to bring real estate into the 21st century. Investors are trying to figure out which model will win.
Eric Wu is the CEO and co-founder, while Ian Wong is the CTO and co-founder. Opendoor has a silicon valley-based executive team, with ex-Amazon, Airbnb, Yahoo, Square, and Yelp members as part of the ranks. After the merger, 9.5% of the company will be owned by the PIPE (private investment in public equity), 6.6% IPOB shareholders (what retail investors can buy), with around 80% being retained by existing Opendoor shareholders.
Palihapitiya will own 4.1% of the combined company, Eric Wu will own 6.7%, and Ian Wong will own 1.3%.
Valuation, Earnings, and Balance Sheet
Estimated $8.6 billion enterprise value based on current IPOB price
EV/sales of 2.15
EV/GP of 29.5
Earnings (2019 numbers. 2020 has been affected by COVID):
$4.7 billion in revenue, up 158% YoY
6.4% gross margins
$248 million operating loss
19,000 homes sold
Over $1.5 billion in cash post merger
$300 million in liabilities
Does Opendoor Have any Competitive Advantages?
Ryan talked about how being digital-first gives Opendoor lower overhead costs. If you have access to an Opendoor account and want to look at a home you can schedule a visit online and visit anytime from 6 AM – 9 PM, no guide needed. This lowers the number of people Opendoor needs to pay in order to run its business.
Ian mentioned how being vertically integrated can improve Opendoor’s unit economics. This includes selling, repairs, loans, insurance, etc.
I discussed how economies of scale could lead to an advantage in pricing vs. competitors. Opendoor is well-capitalized and could potentially reach escape velocity where the value it can offer to customers cannot be matched from a financial standpoint from other iBuyers. My confidence in this happening is not strong though.
What are Opendoor’s Future Growth Opportunities?
Ryan talked about Opendoor’s home loan business which they started in 2019. The product has no loan origination fees and buyers can purchase a home for as little as 3% down. While potentially adding some leverage risk to Opendoor’s balance sheet, it could help them increase margins over time.
Ian discussed the long runway of new markets. Opendoor is only in 21 cities right now and the model, if successful, could scale to any urban center worldwide.
I discussed another add-on to the process of buying and selling a home, which is escrow insurance. They bought OS National in 2019, a company that provides this to homebuyers. Insurance is another way Opendoor could increase its gross margins over time.
What We Liked About Opendoor
We all agreed it was a positive indicator that Social Capital is backing this company. The team over there has a strong track record over the last decade, and we don’t believe they are out to screw investors.
We also discussed how vertical integration can help the company in the long-run and that they could give themselves an advantage if they can scale the quickest out of their competitors.
What we Didn’t Like About Opendoor
There were a lot of concerns with Opendoor. One is that they seem to be trying to “move fast and break things” in an industry (residential real estate) that may not be suited for it. The business is low margin (it is almost like they are forced to recognize GMV as sales, with gross margins being the true sales number) and is trading at a high valuation when looking at the trailing EV/GP number.
Lastly, even if the company executes well on its plan, the business model is predicated on the average price of housing in its geographic areas and a 5% drawdown in prices could crush them financially.
Links to Further Reading/Learning
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.