Through its instant cash offers, Opendoor Technologies (OPEN) offers conveniences that prospective homebuyers in prior generations could only dream about. Understandably, many analysts have stated that Opendoor is the next Amazon (AMZN) for the real estate industry. However, this assessment is largely valid against a superficial framework, not a fundamental one. Therefore, I am bearish on OPEN stock.
At its core, the consumer narrative undergirding what’s known as the iBuyer business model – platforms that leverage innovations such as artificial intelligence to facilitate quick and convenient real estate transactions – is exceptionally attractive. As anybody who has bought or sold a property in the U.S. realizes, the process is vexing, time-consuming, and typically stressful.
However, with Opendoor and similar competing platforms, home sellers can skip to the front of the line, receiving an immediate, data-driven offer for their home. In addition, iBuyer solutions enable greater flexibility, with transactions closing precisely on sellers’ timelines, thus preventing double mortgage payments in cases involving concurrent relocations.
For home buyers, Opendoor also fosters conveniences, allowing them to place an offer without actually having to view the home in person. Here, the COVID-19 pandemic provided a fortuitous tailwind, enabling interested parties to virtually tour properties without leaving the comfort (and safety) of their living quarters.
Again, it’s easy to understand why proponents of OPEN stock will view the underlying opportunity as the Amazon of real estate. However, the volume component just doesn’t work well for iBuyers.
Opendoor Technologies Stock Analysis
On TipRanks, OPEN scores a 6 out of 10 on the Smart Score spectrum. This indicates moderate potential for the stock to perform in line with the broader market.
OPEN Stock, Closed Door
On average, a collection of data points suggests that most people can expect to own three homes during their lifetimes. Of course, this figure can vary depending on where someone chooses to acquire real estate, with some states enjoying significantly lower costs of living. Nevertheless, the biggest takeaway is that the ultimate acquisition number isn’t very large.
Further, the unique disruptions that the COVID-19 crisis imposed may shrink this diminutive average tally to an even smaller number. Thanks to a combination of massive student loans, soaring inflation rates, and the pandemic-fueled housing boom (and possible bubble), the median age of all homebuyers increased to 47 years old, up from 31 years old in 1981.
Logically, then, the current trajectory suggests that most people can now expect to own two homes in their lifetime – if they’re lucky. Factor in the concept that for the vast majority of people, homeownership represents the single biggest transaction they’ll ever make, and the volume potential for the iBuyer business model just doesn’t work.
Considering all the headwinds the economy is suffering from, iBuyers like Opendoor should expect increasingly acute uphill battles. Moreover, for those that can scrounge up the funds for a down payment, they’ll take any discount they can get. Likewise, those selling their homes will seek maximum value for their properties.
Conveniences are pleasant until consumers realize that they come at a premium. Under an economically strained environment, most folks will likely eschew said conveniences for robust savings (or additional money for sellers).
Lessons from Similar Players
In many ways, the online vehicle-shopping platform Carvana (CVNA) is the iBuyer for the automotive industry. Rather than haggling with aggressive salespeople – an encounter millennials prefer to avoid – prospective car buyers can do their shopping at home. Once they find the ride of their dreams, Carvana will ship the car directly to them, complete with a seven-day money-back guarantee.
However, just like the iBuyer model, convenience comes at a price. Typically, customers can get a much better deal through a traditional auto dealership or through private-party transactions. While contactless services carried a premium people were willing to pay, once fears of COVID-19 faded, the paradigm shifted dramatically.
Just look at the erosion of CVNA, which has plummeted 90% on a year-to-date basis.
On the real estate side of things, Opendoor can expect similar obstacles. Without the fear of the pandemic, the convenient contactless transaction angle has lost most of its luster. Now, people want the best deal possible, particularly as higher interest rates spiked borrowing costs across the board. Thus, on a fundamental basis, it’s difficult to justify OPEN stock.
Wall Street’s Take
Turning to Wall Street, OPEN stock comes in as a Moderate Buy based on four Buys, two Holds, and one Sell rating. The average Opendoor Technologies price forecast is $11.36, implying 137.7% upside potential.
The Right Idea but Not the Right Business
Although the concept of fostering conveniences is initially intriguing, the iBuyer business model might not work for real estate. Unlike Amazon, the magnitude of transaction volumes just doesn’t favor real estate. Furthermore, because of the vast economies of scale that Amazon leverages, its offered conveniences are reaching net parity with residual savings associated with brick-and-mortar retail transactions.
Unfortunately, the same cannot be said about the housing market. The use of an honest and competent real estate broker can yield either massive savings or additional money in the pocket as opposed to using iBuyer platforms. With the economy no longer incentivizing contactless services at hefty premiums, prospective investors should think very carefully before buying OPEN stock.
