(Edit: No Paywall Opendoor $OPEN Writeup.) Why I think this shamelessly paywalled company could have a trillion dollar market cap within ten years.

I don’t want to do this, but I only have 5 out of 156 subscribers willing to pay $5 a month.

This is my first time putting something behind a paywall.  I don’t want to do it, but the last paychecks from my old job run out in the middle of August, and while my wife is really supportive and understanding, the number one cause of divorce is women who outearn their husbands losing respect for them.

My goal is to find 1,000 people who believe that five to ten unique small cap value ideas a month is worth a $5 monthly subscription.

Also, I don’t know how much I have to type before the subscribe pay wall kicks in, do I set that manually myself?  This is mostly a test run, I might muck it up, I have technology poltergeists.

During the Super Bowl XXXV in 2001, E-Trade aired a commercial of a chimpanzee on horseback surveying a ghost town of the dotcom carnage. I still chuckle to myself once in a while about pimentoloaf.com.  A tribute to this ad but with Chamath Palihapitiya’s SPACs might be appropriate. 

I don’t mean to dunk on Chamath too badly, in a world where the number of publicly traded companies only shrinks, I am grateful for the new listings.  And of course, companies who go public want to do so at the cyclical peak, no blame there.  So cheap pot shots at the SPAC king aside, the winds might be changing for one of the infamous Chamath SPACs, Opendoor (OPEN). 

Rising interest rates devastated the Opendoor business model, they lost over a billion dollars on the inventory they bought at the peak of the housing market.  When housing prices were rising, holding inventory for six months was a huge tailwind, but when housing prices were falling, the business was devastated.  Much like Carvana, I think the market has forgotten that Opendoor even exists.  

The losses were not isolated to Opendoor, Zillow lost $900 million, and Redfin had some relatively modest losses as well.  More importantly, both Zillow and Redfin announced that they were exiting the ibuying space, leaving the market a race with two horses, Opendoor and Offerpad (OPAD).  Even more importantly, OPEN has since partnered with Zillow so that Zillow users can sell their house to OPEN through Zillow’s web portal and Zillow can be paid a finder’s fee.  Remember, network goods are winner take all, and OPEN’s largest competitor became a sales channel.

The reason for the billion dollar loss during the rising interest rate environment was from adverse selection.  Adverse selection occurs when the little guy has an information advantage over the big guy.  People with qualitatively nice houses choose to shop around for a better offer, but people with qualitatively bad houses take the Opendoor offer.  Opendoor gets a disproportionate number of lemons in their fruit basket.  To address this problem, OPEN is working on using drones to map out the floor plan of homes to identify houses that are awkwardly laid out.  And I have to imagine their AI team is training algorithms to put some sort of estimate on aesthetic curb appeal.  Bit by bit the information advantage that home sellers have over ibuyers is getting chipped away.  But this is going to be a costly Artificial Intelligence endeavor, and OPEN has a ten year head start.

By the way, house prices have started rising nationally again.  Be careful for chart crimes; the median house price is falling because people are buying smaller homes.  But house prices are rising keeping size fixed.  This will allow OPEN to ramp up volume more boldly as their inventory goes up in value while they hold it and a headwind switches to a tailwind.  

Beyond that, the existing home sales market in the US could easily start warming back up again after these last two years of doldrums.  Baby Boomers are positioned to downsize their primary residence to unlock home equity for lifestyle spending, many of them own their homes without a mortgage, and would be cash buyers as they downsize.  Buyers might just get accustomed to 7% mortgages, as the existing sub 4% mortgages age and come to represent a smaller and smaller part of home equity. Jerome Powell has announced his intention to taper the tapering of the Federal Reserve’s balance sheet.  This could help mortgage rates come down a bit, even if the treasury rates stay where they are, because the spread between mortgages and treasuries is near a historic high and could contract.  Take a look at the gap between the series below, it never existed before, and it could go away just as quickly.  A collapse in mortgage spreads back to historical averages would imply that a 4.5% 10-year treasury would result in a 6% 30-year mortgage, not a 7%.

Does anyone doubt that in the future housing transactions will be digitized, or ten years from now will we still have to waste a day sitting down with a title transfer agent in a dingy office signing mountains of frivolous paperwork for a housing transaction that takes over a month from start to finish?  Well, OPEN has a ten year head start in digitizing this process, and appears to be two to three quarters away from being free cash flow positive.  

At its peak, OPEN traded at a price to sales ratio of over 2.  Today that ratio is 0.28 on much lower revenue.  Right now OPEN has 2% market share of their $600 billion addressable market of 24 states, and about 30% of single family homes which fall within their comfort zone.   They have room to expand within the US, to expand their competency to the other 70% of single family homes, and to take market share of a $1.9 trillion market.  (I know that market sounds unbelievably huge, but that’s because it doesn’t show up in GDP because existing homes were not built this year.) And nobody but OPAD is even trying to stop them.

Beyond that, OPEN is expanding to different verticals, offering title and escrow services, and is it really a stretch of the imagination to think that someday they will go after mortgage origination commission, homeowners insurance origination commission, or major appliance insurance origination commission?  

The numbers quickly become absurd, that $1.9 trillion total addressable market will increase with home price appreciation.  Could OPEN grow their market share from 2% to 10% and expand their market to all fifty states and all home types?  In their oldest market OPEN is already 5% market share mostly due to word of mouth advertising over time. Being in all 50 states and having a 5% market share would put their annual revenue up from $5 billion currently ($15 billion at peak in 2022) to $190 billion.  Going from a price to sales ratio of 0.28 to 0.52 would put a $190 billion revenue company at a $100 billion market cap, and remember their price to sales ratio was over 2 at the peak.  OPEN currently sits at a market cap of $1.45 billion.  In my experience, when numbers get beyond a 50 bagger, more precision in the spreadsheet doesn’t help persuade anyone.

So this Chamath SPAC down 80% from IPO could easily be one of the next $100 billion tech companies.  For it to be a $1 trillion tech company within ten years, it would need an average of 4% annual home price appreciation,  to cover all 50 states in the US market (no international presence at all), a price to sales ratio of 2 and an 18% market share.  That doesn’t seem so farfetched to me with Offerpad as their only obstacle.  Even if it took 15 years, that type of market share is not unreasonable for a network who has built out all the major 3rd party sales channels.

There are a few flies in the ointment, with Eric Wu leaving OPEN at the end of this year, none of the original founders will be actively participating.  Control of the company had been transferred to CEO Carrie Wheeler.  Without founder control, non-accretive dilution is more possible, OPEN has announced an at the money offering, but has not pulled the trigger on it, they are waiting for a higher stock price.  Carrie Wheeler, with a private equity background rather than a corporate bureaucracy background, seems to be doing a decent job turning the company around.  On earnings calls, she does a good job laying out the vision, and the path forward is plausible.  For two years, they have been doing what they said they would do, and their situation has been steadily improving.  

I have built a small position, and will be adding to it.  The most imminent catalysts are the switch to cash flow break even, likely within 6 to 9 months, and the transition to profitability after that.  Opendoor was profitable for the first quarter of 2022, just as interest rates crushed their market, and can come back to profitability again.  Mostly what OPEN needs is for benchmark interest rates to not go from zero to five again, and with interest rates already at five, it would be very hard for Opendoor to get hit by the same black swan twice.