At the end of 2020, Opendoor (NASDAQ: OPEN) officially began trading on the stock market. The iBuying start-up was brought to the public market via a special purpose acquisition company (SPAC) by serial SPAC investor Chamath Palihapitiya through his Social Capital Hedosophia Holdings II Corp., formerly tickered NYSE: IPOB.
Opendoor raised $1 billion through the transaction and is now valued at over $15 billion. However, the company is already seeking additional funding; it plans to sell 24 million shares of stock with a goal of raising $680 million. The good news for potential investors is that means we have an S-1 filing to look at.
The pure-play leader
Opendoor was founded in 2014 and was one of the early standouts in iBuying. Instant buying refers to the process of receiving an offer from a company that buys the home before it hits the open market and then makes repairs and resells it within several months. The process is meant to be seamless, providing the seller with a faster transaction, albeit at a reduced price compared to what a home could fetch if it went through the traditional sales process.
Right now, iBuying commands less than 1% of total residential real estate sales. But companies like Opendoor, Zillow (NASDAQ: Z) (NASDAQ: ZG), and Redfin (NASDAQ: RDFN) obviously see the huge potential to scale iBuying and achieve significant revenue growth.
Because of its first-mover advantage, Opendoor was able to expand into multiple markets and become the dominant iBuyer. By 2019, it had raised $1.3 billion in funding and $3 billion in debt, much of that through Softbank's Vision Fund. In 2019, the company sold almost 19,000 homes, creating $4.7 billion in revenue but running at a loss of $339 million.
In 2019, over 560,000 consumers requested an Opendoor offer on their home. A total of around 31,000 homes were sold via iBuyers in 2019, which means Opendoor commanded a very healthy share of the market.
In 2020, along with other iBuyers, it paused operations during the start of the COVID-19 pandemic. Those betting on this being the end of iBuying would be disappointed -- the iBuyers roared back to life, along with the rest of the residential real estate market. Through September 2020, revenue dropped to $2.3 billion, around $1 billion less than it had achieved by the same time period in the previous year, but far better than many real estate watchers were forecasting.
Why more, why now?
Given that Opendoor is on a steady path, why would it immediately ask for more money? Right now, the stock market is highly active, and money is flooding toward new stocks. This is a good environment for raising funds, and it may not stick around forever. Opendoor is active in 21 markets, but it wants to be in the top 100 markets in the U.S.
Another factor is that residential real estate conditions are favorable to iBuyers right now. With less than two months of inventory in the existing home market, competition for available homes is intense. Multiple offers and bidding wars are the order of the day. That creates a great situation for Opendoor, which can promise sellers a transaction without a lot of potential buyers tromping through their home. And Opendoor knows that if it has homes to sell, there's an eager pool of buyers at the ready.
Time to invest?
Given the strong tailwinds, does it make sense to invest in Opendoor? The company has established itself as one of the key players in iBuying, but it's worth noting that no publicly traded iBuyer has figured out how to make a profit on every single home. While Opendoor is now buying and selling at a brisk rate, the pandemic taught us that can change very quickly. Inventory is low now, but if it spikes, Opendoor could be left holding homes it can't sell.
While Zillow and Redfin have robust, mature revenue streams in other areas, Opendoor is just beginning to grow its mortgage and brokerage businesses. That means it could be more vulnerable if housing demand declines or if rising home prices make it harder to obtain homes to refurbish and sell.
All of these factors make the decision to invest in Opendoor tied to whether or not you see iBuying as the future of real estate. The upside is potentially tremendous -- but so is the risk.