For those of you unfamiliar with Opendoor, Opendoor is an online Real Estate platform offering three services.
1. Selling to Opendoor: A person can sell their house to Opendoor. Opendoor charges a fee of 5-8% and a maximum of 14% depending on how they feel about the amount of repairs they will have to do and how likely or how long it will take for them to sell the house. This is basically flipping houses. This is where they bring in most of their revenue from. The operate in 50 markets as of December 31, 2024.
2. Listing with Opendoor: A person can list on MLS with a broker and if a sale goes through, Opendoor gets a referral fee.
3. Opendoor Marketplace: This is where Buyers and Sellers come together and buy or sell homes. If a sale happens, Opendoor charges a fee. It’s essentially an exchange. They operate in only 3 markets as of December 31, 2024.
They did stop expansion into new markets because of unfavourable economic conditions.
The majority of Opendoors revenue comes from their Selling to Opendoor segment. Their revenue for Fiscal 2024 was $5+ billion and a net loss of $392 million. They have been operating since 2014(but only started to grow in 2020 and IPO’d in 2021) and have never turned a net profit. This is largely due to them not having a huge market share in their early days.
Their core business of flipping houses is profitable and they had a contribution margin of 4.7% in Fiscal 2024. Their contribution profit was $292 million. Contribution profit is a very important Non-GAAP metric for this company as this number represents their actual profit from flipping houses after all costs associated with the flipping process such as cost of transaction, brokerage costs and holding costs have been removed from their gross profit.
Their best year so far in terms of the number of homes they sold was 2022. They sold a whopping 39,000+ homes and had a contribution profit of $525 million. They were in a net loss this year largely due to a huge amount of stock based compensation and advertising expenses(majority stock compensation). A lot of executive targets were hit and they had to compensate them. They were also trying to grow their brand name and thus the advertising costs.
Then inflation started ramping up and so did interest rates. This decreased demand for buying homes and thus decreased revenue for Opendoor. Over the last 2 years, their operating expenses have come down to what one would expect from this business and doesn’t include the huge stock based compensation. They can be net profitable and the only way to do this is to increase their market share, which is what I want to discuss.
Opendoor got struck by rising interest rates and thus lower demand for buying homes. This caused them to not be able to get a hint of what their future growth could look like and investors are not able to gauge how popular online Real Estate could be. This is something that one would only be able to judge in a good economy and high demand for buying homes, especially from the younger generation who would be more open to buying online.
They have a referral(forgot the actual name) metric of almost 80 on a scale of 0-100. A score of almost 80 is considered very good.
They only sold 13,200 homes(they were caution in 2024 because of high interest rates and had to take into consideration if a house will resell or not) in Fiscal 2024 and with their current contribution margin and profits, they just need to triple to quadruple their sales to be net profitable. I think this is very doable in good economic conditions(probably after 2026/2027). They did sell 39,000 homes in 2022 but the profitability got lost because of the huge stock based compensation. They could easily generate $100 million in net income and if this were the case, this stock can easily 10x if not more. The stock is trading at less than a 0.5 P/E ratio with respect to a net income of $100 million.
Challenges: With the tariffs in place, I am waiting for the next FOMC meeting to hear what they think about the future. Their growth is highly dependent on interest rates being lower and demand for buying homes being higher.
The total number of existing home sales in 2024 were only 4.05 million. This is the lowest number since 1995. With Real Estate being largely an offline business, Opendoor only gets about 0.3 - 0.45% of total sales in the sector.
Catalysts: The biggest catalysts would be economic conditions get better(this could possibly be in 2027) and their demand increases. Covid acted as a catalyst in rising demand for online Real Estate and their brand received some recognition.
Bear case: The demand for online Real Estae remains low and Opendoor can’t capture more market share. This is definitely very bad for the company as their core business is flipping houses.
Other businesses: Their business of becoming a marketplace is an interesting one. Being an exchange is a good way of staying profitable. I honestly don’t know how this will turn out and can’t really comment on how people will like this platform. They only operate this in 3 markets as of now so not much there at the moment.
What do you guys think? Do you think Opendoor didn’t get a chance to test/demonstrate just how big they can be? Do you think we can base future growth off the good economic conditions of 2021 and 2022?