Here's What's Really Important from Opendoor's 24 Million Share Offering Announcement

Updated: Feb 4, 2021

Mark Chapter 9 verse 35 states, "Sitting down, Jesus called the Twelve and said - Anyone who wants to be first must be the very last, and the servant of all."

Jesus taught on a wide variety of topics, many that were controversial, especially to the religious and political leaders during that time. Today, I find it very challenging to consider the verse above, with respect to societies performance-based standards. However, I find it much more fulfilling to consider the needs of others, irrespective of what's on my plate. When I am more self-absorbed, is when things usually are at their worst. There's always an opportunity to contribute and help others in need.

It is to the point, there's always an opportunity, that I would like to provide an update on Opendoor Technologies (OPEN) recent 24 million share offering announcement. The standard reaction that this offering generates is a quick consideration of share dilution, reflected against the share offering selling price. In the event the selling price is below the current price (usually the case), the Stock Price, SP tends to drop on the news.

However, Opendoor is a unique company as it went public through a Special Purpose Acquisition Company, SPAC, and as such, has never filed a comprehensive financial 10-K or 10-Q incorporating all of the business elements. We have seen projections of expected Revenue growth over time, but no historical basis for this. Per the Form S-1 filing, all of this information has become available for the first time on an annual (2017-2019) and through September 2020/2019 basis.

It is to this point, that I find the most important information from the 24 million share offering announcement, and like the Bible verse above, find the opportunity to provide transparency on the subject matter.

On January 8th, I wrote a blog on the Opportunities & Risks with respect to Opendoor. The main premise of this blog was to focus on Zillow Group (ZG) financial information that directly related to Opendoor's business model. At that time, there wasn't enough information to perform an exact cross-walk, but to assume information. Today, these assumptions have been confirmed.

The opportunity for Opendoor remains the same as what was stated in the last blog, "The core opportunity for Opendoor is the substantial total addressable market (TAM) to transition traditional home sales to e-commerce, a $1.8 trillion opportunity." In fact, the modeling work I have done is still the same as well - my 24-month Price Target, PT, stands at nearly $80 per share, with the increase driven by a lower assumed shares outstanding from the Form S-1, while Revenue estimates remain consistent with management's guidance. This reflects a 165% potential return if estimates are met by 2023, or an potential annualized return of 38% per year, spread from 2021 through 2023.

But the most important element from the financial information that directly relates to the need to raise more capital is now crystal clear, and should cause some pause for investors until we have heard management's update from the 2020 year-end results.

The two most important elements for any company's analysis to base an investment decision on are Revenue growth and Cash Flow, CF, performance. No matter how amazing the business prospects are, at some point in the future, there will need to be a way to value the business on a CF multiple. For Opendoor the CF performance has been highly lumpy with the recent past displaying highly negative performance.

As assumed from the earlier blog, the key line item that has impacted Opendoor's CF performance has been Real Estate Inventory changes. Over the past three years, Opendoor has witnessed negative CF impacts for this line item from $150 million to $1 billion. Concurrently, Opendoor's Operating Cash Flow, OCF, has been negative each of the past three years ranging from negative $200 million to over $1 billion.

However, the pandemic has muddied this as Opendoor in response to COVID, de-risked the Balance Sheet, B/S, by selling the substantial majority of its Real Estate Inventory from $1.3 billion to $150 million as of September 2020. This in turn has generated an OCF amount of $1.1 billion over the Last Twelve Month, LTM, period, roughly a 30% OCF margin as Revenues have been in decline.

This is what was assumed from the last blog, and is in direct correlation with Zillow's CF performance. I must reiterate here that nearly one-third of Zillow's Home sales business still remains non-digital, so we cannot simply compare one-to-one against Opendoor, but competitively, they are direct competitors nonetheless.

So why did Opendoor need to raise another $600 million or so? Because they are anticipating a large hit from buying Real Estate Inventory. To this point, Opendoor's average net debt over the past three years has been around $650 million. As of September 2020, the net cash position stands at just below $750 million. With the capital raise, this will likely jump towards $1.4 billion.

Opendoor is expecting to generate around $2.6 billion in Revenues at the midpoint. This may further increase OCF modestly, so we could see the net cash position further push towards $1.5 billion when all is said and done for 2020. But over the next three years, the company is projecting Revenue growth to $3.5, $6.2, and $9.8 billion. This suggests that an immediate return towards over $1 billion in Real Estate Inventory purchases is on the horizon.

What will be very important to ask during the earnings call for 2020 year-end, which is anticipated to occur no later than March 15th, is will this fund Opendoor through 2023 operations? If it will, then the investment case becomes highly compelling, especially if by 2023, Opendoor is able to sustain itself through its OCF being positive from that point forward.

For me, this is why Opendoor's SP dropped by 6% in after-hours, but is up 3% today. As investors, we don't need to be brilliant or have special resources to read between the lines. We simply need to have transparency on information, and an ability to understand how the pieces fit together.

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