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Opendoor Technologies - Indication of Greater Things to Come

Romans Chapter 8 verse 28 states, "And we know that in all things God works for the good of those who love him, who have been called according to His purpose."


This verse is important to me as I am thankful for God's love for not just me, but for everyone. But I need to accept God into my life if I am to be called according to His purpose. I can't show my love for God if I am not looking to His word and guidance for my life.


Purpose is an important word, especially for investing. What is the purpose of why I am managing a portfolio, when I could easily be letting someone else do it? What is the purpose of my investment return goals? From these questions, I need to also ask myself, will I be capable of outperforming these other options.


God's purpose for my life is to give me freedom and for me to be an encouragement for others for His kingdom in heaven. For investing, my purpose as part of this, is to help create transparency for investors as best as I can, while ideally managing the portfolio towards substantial aggressive growth investment opportunities.


Topic

Opendoor Technologies, Inc. (OPEN) destroyed Wallstreet expectations, again, which has been a theme the past few quarters. The company even turned to positive Cash Flow both for Adjusted OCF/FCF.

To remind investors, OPEN's key B/S metrics need to be understood. The company relies upon Real Estate Inventory, Net to generate Revenue. And this same inventory combined with Restricted Cash needs to be compared as a ratio against Non-Recourse Asset-Backed Debt, which is used to finance the purchase and ownership of inventory. As can be seen above, this ratio is typically 1:1.


The SP popped 15% after-hours so what gives today? OPEN's results were excellent, but the market is not going to acknowledge this transformative business model until it proves its potential with greater scale.


Key Takeaways

Inflection-point is the term that is used to describe something taking off, and OPEN's performance fits this description. Post-pandemic, the company has simply been on a tear. Concerns abound with respect to a bullish real estate market being the culprit, but OPEN is very unique with their business model and market potential. Cleary Revenue and GM have inflected which are core focus areas for the investment thesis to materialize. How quickly everyone forgets 2020, when OPEN was required to de-risk the majority of its inventory and not purchase any homes based on pandemic restrictions. The company is already battle-tested for a scenario that will not be the case for a recession (homes will still be sold and purchased - 4 million at the Great Recession low-point).

Surprisingly for me at least, OPEN witnessed positive Adjusted OCF/FCF from Q1 2022, with respect to the LTM period. This was quite impressive as one can see that OPEN's former annual performance has been negative, albeit not substantially. This is a testament to how scale can unlock Cash Flow performance for the future. I don't believe that OPEN is now a Cash Flow generator from this point forward, but mid-term I am now more confident and will adjust my expectations.


Why Adjusted OCF/FCF? This relates to the former point above. OPEN's B/S items that need not be included for OCF relate to real estate inventory. But I find that some would be very critical of excluding an OCF line item the company reports so the opposite approach is to include the previously mentioned Non-Recourse Asset-Backed Debt for Adjusted FCF. Either way in my opinion is the best measure for Cash Flow performance, I like to use both for transparency.

OPEN is extremely healthy with respect to its Cash Position. Net Cash stands at just below $2 billion, which is completely separate from the inventory/debt relationship above. Separating and understanding OPEN's Debt and financing needs to generate Revenue is vital.


Were there any questionable items? Yes.

While OPEN's Homes Sold and Purchased were tremendous, Homes in Inventory declined during Q1 2022. Management also guided for lower Revenue for Q2 from Q1 levels. This is interesting because Q1 2022 arguably was a higher demand real estate quarter as one would assume the increasing interest rate environment generated stronger home sales activities.


But OPEN's business model and market potential is not dependent upon market fluctuations entirely, but more so adoption of a new approach to real estate home sales and corresponding penetration irrespective of market cycles, for now. In my opinion, the beat against Wallstreet was largely due to the macro environment, but one cannot underscore the value of this demand, combined with the efficiency of OPEN's system further catalyzing the potential. And the Adjusted Cash Flow inflection was impacted by this as well, so for the year, I do not expect OPEN to achieve positive Adjusted Cash Flow, we will need to see.


Ideally, there should be a similar increasing correlation with Homes in Inventory, which will occur for the year collectively, it will be important to understand better the quarterly performance for 2022 and beyond. This is the only issue that I saw with respect to performance.


Why it Matters

OPEN in my opinion is a potential monster, and if it succeeds, will likely be one of the best investment opportunities of the next decade. From a cost basis standpoint, it is the second largest holding in the portfolio as I'm a willing risk-taker.


OPEN is trading 0.2 times EV/Sales, akin to companies like Carvana, Co. (CVNA) or Vroom, Inc. (VRM), while the business model and market opportunity are clearly much stronger. OPEN doesn't need to pay for facilities or logistics/distribution of its inventory! And with the recent quarter's Cash Flow inflection, OPEN is trading nearly 20 times Adjusted FCF/Share. OPEN's Revenue grew nearly 600% in Q1 2022 and the mid-term Revenue trajectory is clearly poised to eclipse $50 billion. An increasing Adjusted FCF Margin will substantially unlock investor returns, especially if OPEN can grow this north of 5% and towards 10% over the next decade.


iBuying is still at very early stages and naysayers and skeptics abound. I believe that traditional Wallstreet metrics are going to be a huge disservice for retail investors on this one. The quarterly result for OPEN is truly an indication of greater things to come. Investors need to be paying attention to the aspects of what is driving the business, and potential investment returns.



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