Amid the growth sector meltdown, shares of online real estate technology company Opendoor Technologies (NASDAQ:OPEN) have cratered. Back in early February, the OPEN stock price nearly touched $40. Today, shares trade below $20 (as of Apr 12, 2021).
This selloff is a golden buying opportunity, and below $20, Opendoor stock offers long-term investors 10X upside potential.
Because this is the future “Amazon of houses” in the making, and buying OPEN stock today could be like buying AMZN stock back in 1997 — before it soared thousands of percent.
So, ignore the near-term jitters in Opendoor stock. Long-term, they’ll look like squiggles in the Opendoor stock chart when the stock price is up above $200. Instead, double-down on OPEN stock below $20, and stay the course for enormous long-term gains.
Here’s a deeper look.
OPEN Stock: Only One Thing Matters
To be sure, I’m not blindly bullish on Opendoor stock. There are a lot of concerns surrounding this company, the iBuying business model, and the broader real estate market.
The company operates in the notoriously volatile game of flipping homes, wherein margins are slim and subject to macro housing market conditions. There’s a lot of competition in the so-called “iBuying” market, and Opendoor isn’t sitting on any breakthrough proprietary technology to separate itself from peers. Net losses are significant, and the business model requires enormous scale to be sustainably profitable.
But, at the end of the day, all of those concerns matter not if Opendoor does just one thing right: Provide a better way for consumers to buy and sell homes than the legacy home shopping model and other iBuyers.
Because, if Opendoor does that, millions of Americans will sell their homes to Opendoor, millions more will buy homes through Opendoor, and the company will leverage economies of scale to become the indomitable 400-pound-gorilla in the real estate market.
It’s exactly what Amazon (NASDAQ:AMZN) did in the retail market.
Remember, back in 1997, Amazon ran huge net losses, was largely undifferentiated from other online sellers, didn’t have any proprietary breakthrough technologies, and required enormous scale to be sustainably profitable. But, over the subsequent two decades, Amazon pioneered the cheapest, fastest and easiest way for consumers to buy goods, and in so doing, solved all the problems bears were worried about in the 1990s and turned into a trillion-dollar company.
Opendoor will do the exact same thing in the real estate market over the next decade, making OPEN stock a great long-term, buy-and-hold situation.
What Makes Opendoor Better?
By the aforementioned logic, the long-term success of OPEN stock rests on whether Opendoor can provide a better way for consumers to buy and sell homes.
The term “better” is subjective. But, in the consumer-facing business world, it breaks down into three things: Easier, faster and cheaper. If a retail process is easier, faster and cheaper, then consumers of all sorts will deem it “better,” and everyone will flock to that service or platform.
So, if Opendoor makes home shopping easier, faster and cheaper, then the company will turn into an enormous long-term winner.
Opendoor Is Easier
Does Opendoor make home shopping easier?
Yes. Without a doubt. It’s a digitally native process that meets consumers where they are spending all their time these days: in an app.
As a seller, you can fill out a form in the Opendoor app and receive a full cash-offer for you home in minutes. Then, you schedule a virtual home tour, refine the initial home offer, and boom, you’re done. No hassle about finding an agent. No hassle about staging, showing your home, finding buyers, or negotiating with those buyers. None of that. Just tap, type, show and sell. It’s significantly easier than the incumbent legacy home-selling process, which is a logistical nightmare.
As a buyer, you can browse listings in the Opendoor app, schedule home tours with a simple click, and with some homes, even on-demand unlock homes as you drive by them. After finding a home you like, you start an offer on your phone, finalize it with an agent, and close the sale if terms are met. If you end up not liking the home, you can return it within 90 days.
Not to mention, the traditional home sale process is highly complex with an average of six counterparties per transaction, which leads to lots of uncertainty (about 20% of transactions end up falling through). Opendoor offers a simple, one-to-one process that will only fall through if the seller decides he/she doesn’t want to sell.
Unequivocally, Opendoor offers both home sellers and buyers an easier way to sell and buy homes — and that’s great news for OPEN stock.
Opendoor Is Faster
The next big question for OPEN stock is whether the Opendoor process is faster than the legacy home shopping process.
The answer? Yes. Again, it’s no competition.
Because the traditional home-selling process involves so many counterparties, it takes forever. On average, the traditional home sale process takes about 87 days to close. That’s three full months.
Opendoor can close a sale in as few as three days.
Again, the process is super simple if you’re a home seller. Download the app. Fill out a form. Receive a preliminary cash offer in minutes. Schedule a video walkthrough. Receive a final offer. Accept the offer. Move out.
That whole process can happen is as few as three days. So long as the traditional home-selling process remains burdened by its physical-first approach and overly complex supply chain, it will never be able to compete with Opendoor on speed.
Unequivocally, then, Opendoor offers both home sellers and buyers a faster way to sell and buy homes.
Opendoor Is Cheaper
This is the big one. Fast and easy are great. But they mean nothing if, in order to deliver superior convenience and speed, Opendoor is compromising on costs. OPEN stock will emerge as a long-term winner if — and only if — the company beats out the traditional home shopping process on price.
Fortunately for bulls, it does: Opendoor offers home sellers and buyers a cheaper way to sell and buy homes than the legacy home shopping process.
Let’s look at it from the seller’s perspective.
Opendoor significantly reduces the cost to sell your home because it essentially takes the big commission fess that real estate brokers take and pocket as income, and applies it to other costs in the selling process.
In a traditional home-selling process, you’ll get hit with a 5.5% agent fee, 1% closing costs, 2% seller concession fees, 1% staging costs, 1% overlap costs and 5% repair costs, for a total all-in house cut of 15.5%.
But here’s what Opendoor does. They take that 5.5% agent fee, cut it to a 5% service fee, and then take four points of that and apply it to seller concession fees, staging costs, and overlap costs. In so doing, Opendoor reduces the total all-in house cut by 4.5 points, from 15.5% to 11%. On a million-dollar home, that implies cash savings of $45,000.
Sure, Opendoor does “low-ball” your initial home offer. But not by much. Data suggests Opendoor will offer you about 98.6% of market value for your home. So, you lose 1.4% on the initial offer, then save 4.5% on costs, for net savings of 3.1%, or $31,000 for a million-dollar home.
Meanwhile, on the buyer side, because Opendoor eliminates the need for its partner agents to spend time and money marketing themselves, the platform is able to pass on cost-savings to buyers, too. Opendoor does this via a 1% closing refund to home buyers, meaning that buying a home through Opendoor is almost always 1% cheaper than buying a home from anywhere else.
Economies of Scale Is Key
Some of you may be asking: Well, how does Opendoor make everything so cheap?
For starters, they axe out a major profit-taking middle man in real estate brokers. But, in addition, they rely significantly on economies of scale.
Opendoor makes about $5,000 in contribution profit after interest on every home it sells. If the company only sold 100 homes, that would imply $500,000 in contribution profit. That’s not much. But Opendoor is selling thousands of homes every year — and that number is projected to rise to 40,000 homes by 2023. All the sudden, taking slim margins on each home sale starts to make economical sense.
It’s the exact same thing Amazon did. Sell everything near-cost to beat out the competition. Use those low prices to attract millions of shoppers. Leverage economies of scale to turn slim profit margins into big overall profits.
It’s a winning strategy which implies that OPEN stock is a long-term winner.
Advantages Over Other iBuyers
So far in this article, I’ve only addressed why Opendoor is better than the legacy home shopping process, not why the platform is better than other iBuyers.
But, rest assured, that is true, too.
Opendoor’s big competitive advantage over other iBuyers is its size. The company controls about half of the iBuying market in America, and is many times bigger than its next closest competitor.
This size lends itself to durable advantages.
The first is data. Opendoor has bought and sold more homes than other iBuyers, has remodeled more homes than other iBuyers, and has done more inspections than other iBuyers. Each home sale, each home remodel, and each home inspection adds multiple proprietary data points into Opendoor’s data lake. When it comes to the algorithmic pricing models that iBuying business models are built on, data is everything. The more data those algorithms have access to, the more accurate the pricing algos will be — and, because Opendoor has more underlying data than other iBuyers, it’s pricing algos should forever remain the best-in-market.
The second is price. As mentioned earlier, a key ingredient to Opendoor’s low costs is economies of scale. The bigger Opendoor gets, the lower the company can move its service fee, because lower unit margins are offset by high volumes. Other iBuyers also rely on economies of scale. But they are much smaller than Opendoor. So, they inherently have to charge a higher service fee. Zillow is at 6%. Offerpad is at 7%.
Big picture: Thanks to its first-mover advantage, Opendoor created two durable, size-driven competitive advantages in better data and lower costs.
Thus, for the foreseeable future, Opendoor will be the best iBuyer in the market.
The Proof Is in the Pudding
Opendoor is pioneering a better way to buy and sell homes that is easier, faster, and cheaper than the legacy home-selling process. The result should be customers flocking to the platform, and being very happy with the process.
The data says that this is exactly what is happening.
Opendoor sold about 3,000 homes in 2017. Before Covid-19 hit, Opendoor sold just shy of 19,000 homes in 2019. That is over 6X growth in just two years. That’s enormous growth.
Opendoor started buying homes in Phoenix in late 2014. About six years later, the company already controls 4.2% of the home-selling market in Phoenix. In Atlanta, Opendoor started buying homes in 2017, and today, already controls 4.6% of the market. In Raleigh-Durham, Opendoor commands 5.5% market share — and they just started buying homes in that market in 2018.
Importantly, Opendoor’s service fee has historically been as high as 14%. The company just recently fixed it an industry-low 5%. So, Opendoor has been able to slice out 4% to 6% market share for itself in its most established markets in just a few years even without the best prices.
Now, Opendoor has the best prices (thanks to economies of scale). The implication is that growth going forward should be absurdly fast.
Beyond market share numbers, Opendoor’s customers are extremely happy with the process. Just read the reviews. Super fast. Super cheap. And super easy. Those are things you will see come up, over and over again on every review site for Opendoor. The average ratings across various review sites exceed 4 out of 5 stars.
In other words, Opendoor is more than talk. The company is walking the walk, too, and both attracting tons of new home shoppers as well as leaving previous home shoppers very pleased with the process.
Bottom Line on OPEN Stock
Listen. There’s a reason all four Wall Street analysts covering Opendoor have a “Buy” rating on the stock, with an average price target of $36.50 — almost double the current price.
That reason is that Opendoor is fundamentally a very, very strong company, with significant long-term earnings growth potential, and a discounted stock price relative to all that growth potential.
I firmly believe that Opendoor will eventually and inevitably emerge as the Amazon of houses, and that long-term, OPEN stock will be trading well north of $200.
For long-term investors who believe that the future of home shopping is digital, then, this recent dip in OPEN stock is a golden, once-in-a-lifetime buying opportunity.
But it’s far from the only great buying opportunity amid the recent growth sector meltdown. Instead, I think the recent selloff in some of the most innovative companies on the planet represents an opportunity to score 10X returns across a number of stocks.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.