October 7, 2022


Skillful Business Crafters

Why Opendoor Stock Shot Higher After Q3 Earnings

Opendoor Technologies (NASDAQ:OPEN) is reimagining residential real estate. Its platform streamlines transactions, making it possible to buy and sell a home on a mobile device. Specifically, Opendoor leans on data science to buy and sell homes, and it provides supplemental products like home loans, title insurance, and escrow services.

In this Backstage Pass video, which was recorded on Nov. 10, 2021, Motley Fool contributor Travis Hoium discusses Opendoor’s third-quarter financial results, hitting on the strengths of its iBuying business. He also explains where investors should focus their attention in the coming quarters.

Travis Hoium: Results came out a little bit ago, about a half- hour ago. Here’s a high-level look at what the company did: $2.01 billion in revenue, that’s up 91{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} from a year ago, easily beat expectations. A loss of $0.09 per share. The loss is 90{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} smaller than it was a year ago. So that’s good news. Outlook for $3.1 billion to $3.2 billion in revenue for Q4. So Zillow exits the iBuying business because they’re losing all kinds of money. Opendoor comes in a week later and basically says:”This is going great, [laughs] I don’t know what you guys were doing.” [laughs]

Even over the last few quarters, there’s been a lot of questions about the iBuying business and what the right business model is going to be. If you were a bull on Zillow, which I was [laughs] until a week ago, the idea was that they had this funnel where they could bring all the customers in, they would be a buyer of choice. The other case would be for a company like Opendoor, who, this is what they do. They were not going to make an announcement today that they’re going to exit the iBuying business because they wouldn’t have a business left. They are much more focused on getting the iBuying business 100{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} right. One thing that really stood out to me from the earnings report is, they’re reporting margins of about 9{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} from their sales. Zillow was trying to basically break even. If you think about the risk profile in the iBuying business, if you have a whole bunch of inventory, and I have it on the slide here, what is it says $6.3 billion in inventory that they now have on their balance sheet. If your value goes down 10{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, you’re in a world of hurt, even if you’re the company the size of Zillow.

So you have to have that cushion of that little bit higher margin. Opendoor appears to have that, at least right now, and so their operations are going really well despite what Zillow reported. Acquired 15,181 homes, which is just a crazy number to me, only sold 4,988.

So the one thing that I do want to watch going forward is based on their outlook of a little over $3 billion of revenue, that implies only about 7,500, maybe 8,000 of those homes are going to be sold in the fourth quarter. Are they able to turn homes fast enough to make money long term? That’s a question that we don’t quite know. Given how fast these companies are growing, it’s going to take a while to really let that play out, so that’s something to keep an eye on. That gross profit margin I mentioned, that 8.9{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b}, did come down a little bit from the second quarter. That is consistent with what we saw with Zillow, but they have a lot more leeway there in Opendoor’s business.

Overall, I think it was really positive. The stock was down today during trading. One of the reasons I think, and this hit SoFi as well, is Chamath Palihapitiya actually made some comments about how tech stocks are going to get hammered. [laughs] It just so happens that two that he was involved in and has a stake in were down big today. But it was up 20{614c55998ee2f2593d42882a86444f5648ce8ae9e914fe55020881091372b47b} at one point after hours so it seems like a positive response right now. A lot left to play out here, but it seems like the numbers are going in the right direction for Opendoor.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.