Opendoor (NASDAQ:OPEN) stock has had a blistering year, soaring by 167% year-to-date, proverbially mopping the floor against the S&P 500, up 18.9%.
With such a stunning share price gain, the future appears to be bright again for Opendoor shareholders, so how will the company fare over the next few years?
Opendoor Has a Technological Edge
Opendoor didn’t launch with the revenue streams and business model it operates today. Instead, it has evolved from an initial focus on buying homes, renovating them and selling them for profit to expand to trade-ins and even home loans.
Underpinning the business success is a sophisticated data-driven pricing algorithm that relies on big data and machine learning to accurately price homes. The efficiency and accuracy of the technology is pivotal to the firm’s success, or lack thereof, because it directly affects margins, inventory turnover rate, and profitability.
Opendoor also relies on an extensive range of partnerships to provide a competitive edge. The relationships it has fostered span homebuilders and financial institutions, and collectively lead to insights that have accelerated growth.
In the overall, the company has built a product that resonated with consumers. Not only has the pricing algorithm been well-received as accurate and trustworthy but consumer-facing applications have boosted customer experiences too. As a result, Opendoor has managed to expand geographically, adapt its model to regional real estate markets and hence grow in new areas.
The success has been evident in a larger market share in the regions in which it operates. Indeed this growth signifies strong operational efficiencies and brand acceptance by consumers who have shared positive experiences through word-of-mouth referrals, a crucial driver of growth in real estate.
How Opendoor Eclipses Competitors
Numerous factors separate Opendoor from its rivals but a couple of key ones are speed and convenience.
Opendoor is known to be both faster and simpler for sellers, who in a matter of just a few days can sell their properties and bypass traditional, and often lengthy listing processes, showings, and negotiations.
This is made possible by the company’s pricing algorithm that enables instant offers to be made on homes and reduces much of the subjectivity and potential biases of traditional real estate pricing.
Compared to traditional real estate agents, who primarily facilitate transactions, Opendoor offers a full end-to-end solution that encompasses not just the buying and selling process, but also home loans. So too the staging process often encouraged by realtors can be skipped, further saving sellers time, cost and headaches versus the traditional sale process.
And in an industry notorious for fee opacity, Opendoor brings a refreshing transparency where its services charges are clear versus the traditional commission structure of real estate agents.
It’s not just got a leg up against local realtors but iBuying competitors too. Compared to well-funded rivals, Opendoor targets bigger and broader market opportunities, spanning a variety of home values and conditions.
As a result of its first mover advantage in these markets, it also gains operational insights that can be leveraged later and, among consumers, higher brand recognition.
Put all of these factors into the mix and what does it look like for the future prospects of the stock?
Where Will Opendoor Stock Be In 5 Years?
According to a 5-year discounted cash flow forecast model, Opendoor share price can rise to $3.18 per share. That model would infer the stock can rise by about 6% from current levels.
It’s worth emphasizing that the stock has been on a huge bull run this year, eclipsing the $5 mark in August and the $3 threshold in November, up from barely $1 and change at the start of the year. As a result, the margin of safety has been considerably reduced in less than a twelve month period. So too has the upside opportunity slimmed versus a year ago.
With that said, Opendoor’s collaboration with Zillow is a big deal. When Z stepped out of the iBuying industry it selected Opendoor as its partner. Joining forces appears to be a win-win with Opendoor announcing further expansion with Zillow into other markets.
According to analysts, though, much of the good news has been priced in. In fact, the consensus among 11 analysts is for Opendoor share price to fall towards $2.29 per share. Sentiment has shifted negatively in recent weeks with 5 analysts revising their guidance lower for the stock.
The primary reason for the trepidation appears to be a slowdown in revenues. But it must be said it’s not the only financial concern. Opendoor also operates with fairly slim margins, notably gross margin tends to be under 10% most quarters. In addition, it has a poor return on assets of -8.5%.
Opendoor appeared to have stiff competition a few years ago when Zillow entered the iBuying sector. At the time, the market was excited by the prospect of Z broadening its revenue base from connecting homeowners and renters with real estate agents. But the strategy soured and with it an opportunity for Opendoor to capitalize and take market share, which it successfully did by subsequently partnering with its former rival.
Now that OPEN share price has soared tremendously this year, far eclipsing the returns of the broader based market, the upside to fair value has substantially reduced and the margin of safety is small.
Nonetheless, the company has built a seamless user experience on top of a cutting-edge technological platform so the long-term prospects are still bullish, even if the financial metrics near-term leave much to be desired.
At this time, Opendoor sits in the Hold column for investors who have enjoyed the run-up but it doesn’t offer a compelling reward to risk proposition for new buyers. Better to sit on the sidelines and see whether volatility down the line offers a better entry point.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.