Editor’s note: “Opendoor: The ‘Amazon of Houses’ Keeps Getting Better” was previously published in August 2022. It has since been updated to include the most relevant information available.

For those who are unfamiliar, Opendoor (OPEN) is the world’s largest iBuyer. The company uses technology and data science to buy homes from sellers virtually. It then turns around and uses that same approach to sell those homes to prospective buyers.

We love this business model. We think it’s genius. It dramatically improves the archaic, universally-hated home-buying model. Specifically, Opendoor makes the home-shopping experience:

• Cheaper – it axes profit-taking middlemen (real estate agents) and replaces their often-flexible 6% commission with a 5% flat transaction fee.
• Faster – Opendoor’s advanced data science methods accurately price a home in minutes. And sellers can close a sale in as few as three days.
• Easier – Opendoor allows folks to literally sell their home from their mobile phone with just a few clicks.
• Simpler – Opendoor simplifies home-selling into a unified process between just the seller and Opendoor. Say goodbye to disjointed and complicated sales between multiple parties.
• More convenient – Opendoor allows sellers to choose their closing dates and escrow periods, enabling the flexibility to move on their own time.
• More reliable – Opendoor’s offers are all-cash. And its transactions never fall through because it “fails to qualify” – something that happens quite often in the home-selling process.

From a consumer advantage perspective, Opendoor is creating a superior way to buy and sell homes. It’s the future of home shopping. By 2030, we believe a large majority will use Opendoor to buy and sell homes. It’ll be much the same way shoppers today use Amazon (AMZN) to buy goods instead of going into Walmart (WMT) or Target (TGT).

To that end, we see Opendoor as an early stage “Amazon of Houses.”

Don’t Worry About Profitability

For those concerned about profits, worry not.

It’s true that Opendoor’s fourth-quarter earnings report was the disaster that most people were expecting. The company sold a majority of its homes in inventory at a loss and racked up a $467 million adjusted net loss in the period. And management expects next quarter to be ugly, too. But the good news is that this should be the worst of it.

Opendoor’s presently ugly results are the byproduct of the company acquiring a bunch of homes in the first half of 2022, before housing prices dropped. Now it’s having to sell all those homes at a loss. Eventually, though, all those homes will be sold. And we’re nearly at that point right now.

The company has already sold through 66% of its “old book” – homes acquired before Q2 2022 – and expects to sell through 85% of that old book by the end of this quarter. In other words, almost all those loss-making homes will be off Opendoor’s books by the end of this quarter. At that point, the company will be able to focus on its “new book” – homes acquired after Q2 2022 – which is performing very well. New book homes are currently selling at 13% gross margins with 10% contribution margins, versus negative gross and contribution margins for old book homes.

Once Opendoor fully sells through its old book – likely by mid-Q2 of 2023 – the company’s revenue growth rates should reaccelerate meaningfully higher, gross and contribution margins should pop back into the black, and net losses should turn into net profits. Indeed, management is targeting mid-2024 to return to net profits. Between now and then, we think that the trajectory of Opendoor’s key operational metrics will flip from worsening to improving and that OPEN stock will go from falling to rising. We’re as bullish as we’ve ever been on OPEN stock at these levels, with a potentially huge operational turnaround on deck and shares trading at a dirt-cheap valuation.

At scale, the company should be able to net gross margins north of 10% – driven by a mix of the commission fee and housing price appreciation. That’s very similar to what Amazon’s retail business nets on its gross margins. Economies of scale have enabled Amazon’s retail business to become very profitable. Similarly, economies of scale will enable Opendoor to be very profitable one day, too.

The Final Word

We believe this quarter is the beginning of Opendoor proving the resiliency of its business model to Wall Street. Once Wall Street is fully convinced – maybe within another few quarters as operational metrics improve – this stock will fly higher.

We’re pounding the table on this stock as a multi-bagger with 10X potential.

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On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.