1/19 thread
Opendoor is intriguing to me now that Zillow is out of the picture.
Here are some bear theses I see and some potential rebuttals...
#1: Housing will crash
#2: Unsustainable business model
#3: Capital intensive
#4: iBuying is unsustainable
#5: Low gross margins
Opendoor is intriguing to me now that Zillow is out of the picture.
Here are some bear theses I see and some potential rebuttals...
#1: Housing will crash
#2: Unsustainable business model
#3: Capital intensive
#4: iBuying is unsustainable
#5: Low gross margins
2/
#1: Housing market will crash
Even in 2008, the biggest single-month decline was 2.5%. Opendoor holds houses for about 90 days and about half of that is in contract with a buyer.
The actual exposure/duration is quite short and Opendoor has a strong pulse on the market.
#1: Housing market will crash
Even in 2008, the biggest single-month decline was 2.5%. Opendoor holds houses for about 90 days and about half of that is in contract with a buyer.
The actual exposure/duration is quite short and Opendoor has a strong pulse on the market.
3/
Further, the core purpose of Opendoor is to increase the liquidity of housing. It's almost like a market maker.
In crisis, the bid-ask spreads are typically wider, leading to higher margins for the market maker. Opendoor could actually have better margins in a panic.
Further, the core purpose of Opendoor is to increase the liquidity of housing. It's almost like a market maker.
In crisis, the bid-ask spreads are typically wider, leading to higher margins for the market maker. Opendoor could actually have better margins in a panic.
4/ #2: The business model is unsustainable
Yes, they lose money currently. But over the past 12 months, EBITDA was about breakeven.
On a unit economic basis, contribution margins after interest expenses are quite positive at around 8%.
Yes, they lose money currently. But over the past 12 months, EBITDA was about breakeven.
On a unit economic basis, contribution margins after interest expenses are quite positive at around 8%.
5/ The company also does roughly $35k in gross profit per home so it's certainly not like they are selling most of their homes at a loss.
In fact, EBIT margins looked pretty bad in Q1 and Q2 because of elevated SBC charges related to it going public via SPAC.
In fact, EBIT margins looked pretty bad in Q1 and Q2 because of elevated SBC charges related to it going public via SPAC.
6/ In Q1, SBC made up 32% of revenue and EBIT was -$245 million.
In Q3, a more normalized quarter, SBC was just 3% of revenue and EBIT losses were -$68 million.
That's an improvement from -33% margins to -3% in 6 months, mainly due to SBC (stock-based comp).
In Q3, a more normalized quarter, SBC was just 3% of revenue and EBIT losses were -$68 million.
That's an improvement from -33% margins to -3% in 6 months, mainly due to SBC (stock-based comp).
7/ #3: It's capital intensive
Yes, it is. The company has to take on a lot of debt because they are holding the inventory.
Roughly about 85% of their inventory is covered by debt so that is about $5.4 billion.
But this debt is backed by real homes.
Yes, it is. The company has to take on a lot of debt because they are holding the inventory.
Roughly about 85% of their inventory is covered by debt so that is about $5.4 billion.
But this debt is backed by real homes.
8/ Asset-backed debt has much lower interest rates and Opendoor already has $9 billion in capacity.
If Opendoor can keep inventory turnover quite high (under 90 days and improving), then I won't be as worried about this.
However, OPEN does deserve a low multiple b/c of this.
If Opendoor can keep inventory turnover quite high (under 90 days and improving), then I won't be as worried about this.
However, OPEN does deserve a low multiple b/c of this.
9/ #4: iBuying, in general, is unsustainable
If Zillow can't do it with all the data they have, why would Opendoor be able to?
I think focus and cultural DNA is important. One of OPEN's core values is "bps for breakfast"
They have a culture of extreme frugality.
If Zillow can't do it with all the data they have, why would Opendoor be able to?
I think focus and cultural DNA is important. One of OPEN's core values is "bps for breakfast"
They have a culture of extreme frugality.
10/ There has been a lot said about Zillow's iBuying but if you look at the contribution margins compared to Opendoor, they are quite different.
Over the past 2 years, Zillow's contribution profit per home was negative whereas Opendoor's was quite positive.
Over the past 2 years, Zillow's contribution profit per home was negative whereas Opendoor's was quite positive.
11/ In Q3, Zillow's contribution profit per home was $7k vs. $27k for Opendoor.
Based on that datapoint, Zillow getting out of iBuying seems more like a Zillow-specific problem than a iBuying problem in general.
Based on that datapoint, Zillow getting out of iBuying seems more like a Zillow-specific problem than a iBuying problem in general.
12/ Further, it is really telling that Opendoor was able to acquire 40,000 homes this year, despite record price appreciation.
You would think that people wouldn't want to sell to Opendoor when they could easily list and people were clamoring to offer over-asking.
You would think that people wouldn't want to sell to Opendoor when they could easily list and people were clamoring to offer over-asking.
13/ Yes, Opendoor has benefitted from price appreciation on the selling side but it has been tough on the buying side which is where they make their margin (buying right is more important than doing renovations).
However, 40k people chose to take a lower offer for convenience.
However, 40k people chose to take a lower offer for convenience.
14/ #5: Low gross margins
You can think of Opendoor like Amazon's first party business. They take a home from a seller (supplier), hold the inventory, and then sell it to a buyer.
The home sales are basically GMV. So yes, gross margins likely won't be much higher than 10%.
You can think of Opendoor like Amazon's first party business. They take a home from a seller (supplier), hold the inventory, and then sell it to a buyer.
The home sales are basically GMV. So yes, gross margins likely won't be much higher than 10%.
15/ But the conversion from gross profit to EBITDA is expected to be upwards of 60% in the longer term which is more important than the absolute level of gross margin.
And a low gross margin keeps away too much competition (Zillow is a perfect example!)
And a low gross margin keeps away too much competition (Zillow is a perfect example!)
16/ Opendoor has also been increasing its focus to help home buyers as well. Once Opendoor buys your house, they will now even help you put in a cash-backed offer for a new home.
And of course, there is title, mortgage and escrow. These are higher margin than the core iBuying.
And of course, there is title, mortgage and escrow. These are higher margin than the core iBuying.
17/ Opendoor Complete is the culmination of iBuying and helping people buy with Opendoor. It was only announced recently in November: opendoor.com/w/blog/introdu…
18/ To be clear, Opendoor is a risky investment. However, I think the upside is quite large & most of the risks are mitigated when you look at the cultural DNA of the company.
I'm not saying there are no risks, it's just that there is more substance here than I was expecting.
I'm not saying there are no risks, it's just that there is more substance here than I was expecting.
End/
What other risks am I missing? Thanks in advance, just trying to think through this one.
I see some similar patterns to Carvana actually, but with a larger market opportunity :)
What other risks am I missing? Thanks in advance, just trying to think through this one.
I see some similar patterns to Carvana actually, but with a larger market opportunity :)
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