Opendoor — The next $50+ billion company
Opendoor is disrupting the residential real estate industry. It could become a dominant player in the digital transformation of the consumer real estate industry over this decade.
*** I’m currently long Opendoor (NYSE: IPOB) ***
Opendoor to combine with Social Capital Hedosophia (NYSE: IPOB)
Today Opendoor, the innovator and market leader in digital home transactions, has announced that it has entered into a definitive business combination agreement with Social Capital Hedosophia Holdings Corp. II (NYSE: IPOB), a publicly traded special purpose acquisition company. This will enable Opendoor to go public.
Opendoor will have an enterprise value of $4.8 billion in the deal, including equity value of around $6.2 billion and around $1.5 billion in cash. Social Capital Hedosophia II will provide up to $414 million in cash as part of the deal, while a private investment in public equity transaction, or PIPE, will provide another $600 million.
The PIPE consists of $100 million from Chamath Palihapitiya, Founder and CEO of SCH, $58 million from Hedosophia, and the remainder from existing Opendoor shareholders, Access Industries and Lennar, along with Opendoor management. BlackRock and Healthcare of Ontario Pension Plan (HOOPP) will invest $400 million.
In my last article, I have speculated why Opendoor would be an attractive partner company for Social Capital based on:
- Alignment on mission: “Solving the hardest problems”
- Massive B2C growth opportunity
- Experienced leadership team
- Tremendous support by well-known long-term investors
In this article, I want to focus on the investment opportunity. Before the thesis, I will shortly summarize the origins of Opendoor.
Silicon Valley Origin Story
First of all, you have to acknowledge that Opendoor is a true Silicon Valley success story. Eric Wu and Keith Rabois, two of the co-founder, had the vision in 2014 to solve one of the greatest challenges in residential real estate just a few years after the financial crisis: liquidity.
With a mobile-first experience and the proper financial backing, the company has grown to over $5 billion in revenues in just 5 years.
Opendoor has reinvented the real estate transaction, offering an on-demand, digital experience to buy and sell a home. Opendoor enables homeowners to sell and buy online in a few taps of a button, providing greater simplicity, certainty, and convenience than ever before. Since its founding, the Company has served over 80,000 customers and sold over $10 billion of homes. In 2019, the company sold more than 18,000 homes, generating $4.7 billion in revenue.
It’s amazing to see how much foresight the founders Eric Wu and Keith Rabois already had in 2014. Most of their initial pitch is still valid today.
Here you can find the pitch deck that they used to raise their series A round of $9 million. The problem slide states that the home-selling-process is too lengthy, expansive, and bespoke:
Many investors realized the massive opportunity quickly. In the first financing round, many prominent Angel Investors got involved. It closed its $9.95 million seed round in 2014. Khosla Ventures was the lead investor.
Who was also involved?
Paypal co-founder Max Levchin, Former YouTube and Facebook CFO Gideon Yu, Eventbrite co-founder Kevin Hartz, Y Combinator’s Sam Altman, Quora CEO Adam D’Angelo, Yammer co-founder David Sacks, Angelist’s Naval Ravikant, Yelp CEO Jeremy Stoppelman, Box CEO Aaron Levie, Initialized Capital’s Harjeet Taggar, Garry Tan and Alexis Ohanian, Former Twitter vice president Elad Gil, Blippy co-founder David King, Flixster co-founder Joe Greenstein, Angel investor Mike Greenfield, Quora co-founder Charlie Cheever, Path’s Dave Morin, Facebook vice president Dan Rose, Trevor Traina, Resolute Ventures’ Mike Hirshland, Caffeinated Capital’s Ray Tonsing, Felicis’ Aydin Senkut, True Ventures’ Om Malik, Thrive Capital’s Josh Kushner, Crunchfund’s Michael Arrington (who founded TechCrunch) and SV Angel.
So, here is the investment case for Opendoor (NYSE: IPOB):
Investment thesis
Opendoor (NYSE: IPOB) offers an asymmetrical risk-opportunity to bet on the massive $1.6 trillion residential real estate market in the United States (1), with the category winner that provides superior consumer experience and a low-cost platform for moving (2) and experiences rapid growth (150% CAGR — 2017–2019) at scale ($4.7 revenue in 2019) (3) with the optionality to grow via market and services expansion (4).
1. Total addressable market
The real estate market is the largest market in the US with over $1.6T annually. It’s 2x larger than used cars and 1.6x larger than food.
While many markets have been already digitally transformed, this market is extremely fragmented and still undisrupted by digital transactions. Only 1% of homes are sold digitally. The current experience is offline, slow, inconvenient, and is served by many part-time realtors. There is no single company dominating this space, allowing for an aggressive incumbent like Opendoor to grow rapidly.
According to Chamath Palihapitiya, there are five positive tailwinds for the residential real-estate market that should support further growth:
Positive tailwinds
- In many cities, housing affordability is poor because of a large supply/demand imbalance and it’s causing Americans to relocate.
- Federal elimination of SALT (state and local tax deductions) and decaying state budgets are creating higher taxes that motivate people to move.
- 75 million, digitally-native millennials are beginning to start families and enter the housing market, which will drive demand for buying homes.
- Working from home is here to stay. As a result, people can make quality of life decisions and life where they want, even it’s simply moving from urban to suburban locations.
- The Federal Reserve’s view on interest rates will keep rates at or near zero for the foreseeable future. This will increase the purchasing power od the US homeowner to more or upgrade.
2. Category winner
Opendoor is currently the clear category winner in the ability to buy and sell homes online. They are the first mover with already over 80k home sold with a transaction value of $10 billion. In 2019, Opendoor sold 4.4x more than its next closest competitor.
While dominating the space, the company provides a better customer experience. Over 70% of Opendoor users would recommend the service to others. This NPS (net promoter score) is comparable to other category winners like Netflix, Uber, and Carvana.
Opendoor offers a whole platform to support the transaction from pricing, home ops to fulfillment. This process is based on software and data science.
Most of Opendoor’s business is built around data. The pricing models are based on machine learning and are improving in its accuracy over time.
“I like businesses that build non-obvious data links.” — Chamath Palihapitiya
According to Chamath, Opendoor creates a virtuous cycle that represents a defendable moat for the company:
More offers → More sales & more purchases → Broader geographical coverage → Cheaper capital/Scaled value-added services → more demand
3. Rapid growth
Opendoor has experienced massive growth in the past while scaling the business from $0 to $5 billion in revenues with an impressive 150% compound annual growth rate from 2017 to 2019.
It estimates to grow its revenues from $2.5 billion in 2020 to $9.8 billion in 2023 with an impressive compound annual growth rate (CAGR) of 58% while improving its contribution margin from $72 million (3%) to $539 million n(5.5%).
The current business plan foresees Opendoor to operate in 100 different markets and with a 4% market share, the company could reach a $50 billion run-rate.
Opendoor is in the early stages of the digital transformation in real estate. Companies that are digitally transforming legacy industries demand proper market capitalization, e.g. Amazon ($1.5T) in retail, Uber ($50B) in transportation, and Carvana ($30B) in used auto sales. Within this decade, Opendoor has the potential to 10x its market cap and reach a market cap of over $50B.
4. More services
Opendoor has the optionality to expand beyond home transactions to digital services that revolve around the home e.g. title and escrow, financing, insurance, warranty, upgrades, home maintenance, and moving services. This will generate additional revenues and improve the overall contribution margin.
Digital transformation in real estate
In conclusion, Opendoor (NYSE: IPOB) offers an asymmetrical risk-opportunity to bet on the massive $1.6 trillion residential real estate market in the United States (1), with the category winner that provides superior consumer experience and a low-cost platform for moving (2) and experiences rapid growth (150% CAGR — 2017–2019) at scale ($4.7 revenue in 2019) (3) with the optionality to grow via market and services expansion (4).
*** I’m currently long Opendoor (NYSE: IPOB) ***
