Opendoor was knocked down by Zillow’s Wake


That supposed ten bags now has twice the benefits. But it can also be twice as risky.

Shares of Opendoor Technologies OPEN -1.07%

are down 24% since the residential real estate pinball released its fourth quarter results on Thursday and more than half since Chamath Palihapitiya’s front company, Social Capital Hedosophia II, announced a merger in September 2020. At the time, Mr. Palihapitiya called out Opendoor, which later went public, with his next “10x idea” in an interview with CNBC.

Many companies that have listed through special purpose acquisition companies have failed to achieve their goals. Opendoor is a rare outlier. In September 2020, Opendoor predicted total revenue of $9.8 billion for 2023. In the fourth quarter of last year, the company was already operating at an annual rate of $15 billion for its core iBuying business alone. .

Call it the Zillow Z -0.47%

fear factor. Prior to its decision to end its massive bet on iBuying, Zillow Group was targeting a return on homes sold before interest charges between plus or minus 200 basis points of breakeven. The swings were much more important than that. In November, the company cited the unpredictability of home price forecasts as the reason it was leaving the business.

Perhaps that’s why investors were spooked when Opendoor last week said its fourth-quarter contribution margin was 4%, down from 6.5% a quarter earlier and 12.6% one year earlier. While macro conditions have certainly changed, it’s worth noting that its contribution margin decline came despite Opendoor generating $3.8 billion in revenue in the fourth quarter. That’s more than 14 times what the company put in place during the same period a year earlier.

Some analysts believe the Opendoor story is misunderstood. Wedbush’s Ygal Arounian expects margins to improve sequentially in the first quarter, noting the “very healthy” quality of Opendoor’s inventory. Indeed, Opendoor said at the end of the year that only 8% of its homes had been on the market for more than 120 days, which is significantly lower than the equivalent percentage of comparable homes in the broader market.

But it might have something to do with the percentage of homes that Opendoor, a company that continues to tout its goal of creating a world-class customer experience, has recently sold to investors. Citing database management firm Attom Data Solutions and public ownership records, Mike DelPrete, a researcher-in-residence at the University of Colorado at Boulder, estimates that Opendoor sold 22% of its inventory to investors last year. last year. YipitData estimates that more than 10.5% of Opendoor’s inventory was sold directly to investors in the fourth quarter without ever listing on Opendoor.com, up from 2.2% in the first quarter of 2019.

While selling quickly to investors will likely reduce host holdings for iBuyers, there are likely only a limited number of homes Opendoor can sell this way, if it wants to be a consumer-focused company. . Plus, there may one day be legal limits: In November, lawmakers in the city of Los Angeles, for example, were looking at ways to thwart iBuyers’ ability to purchase single-family homes.

As for consumer sales, rising mortgage rates could deter future buyers from entering the market this year, potentially increasing holding times for iBuyers. Opendoor finances its own houses with debt, which subjects it somewhat to the risk of rising interest rates. The company said last week that it only expects a 20-30 basis point increase in unit costs due to rate increases during 2022. But it has about 6.1 billion of non-recourse asset-backed loans as of Dec. 31, 2021, with total non-recourse asset-backed debt borrowing capacity of $10.8 billion, according to its fourth quarter filing. He also notes that corporate leverage could have significant consequences, including vulnerability in the event of an economic downturn.

Opendoor more than doubled its market footprint last year and ended 2021 with an inventory balance of 17,009 homes across 44 markets worth $6.1 billion. A September 2020 investor presentation shows a one-day trading target in 100 U.S. markets, generating an execution rate of $50 billion.

Give the company credit for aiming high: in 2019, Zillow said it planned to generate $20 billion in iBuying by 2024. We all know how that turned out.

Write to Laura Forman at [email protected]

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