Open and Shut: Why I’m Not Closing the Door on Opendoor

I’ve got a problem. I keep falling in love with low margin businesses. I’m not quite in love with Opendoor, but I am curious about it. Let’s talk it through.

What’s an Opendoor?

Opendoor is a company that buys and sells home in an extremely consumer friendly way. Selling your home is an extremely painful process, but Opendoor makes it incredibly easy. Essentially, you request an offer, Opendoor makes an instant offer then does a small amount of follow up to finalize the offer. The seller sets the schedule for closing and doesn’t have to deal with any of the extra hassle of showings, repairs, buyers backing out, etc…

For their role in the transaction, Opendoor charges a 5% fee (and hopes to sell the home for more than it is worth). In general, Opendoor turns homes in 120 – 180 days, but feels they could get this number close to 90 days.

Problems In the Air

Opendoor has been on a wild ride. From a high of ~$40, the stock is now down to $3. What is driving this massive drop?

Just like the stock market, the housing market has been rocked by rising interest rates. Opendoor finds itself stuck in the middle of all these trends. Worse yet, reports came out claiming that Opendoor has sold 42% of its home for a loss in August. Now, some of this news is just fake news. The 42% number neglects to take Opendoor’s fee into account, but either way, the amount of homes sold for a loss is still relatively high and a major hit to their financials. Datadoor is a fun tool to help review Opendoor’s trends if you want to dive further into the data.

Is iBuying a Bad Idea or Does it Just Seem Like One?

The beauty to this question (and really 99% of questions) is that no one really knows. In many ways, it is a bad idea. Huge balance sheets and low margins in a volatile industry seems like a bad idea.

Yet, I can see successful ibuying future if I squint. Fundamentally, the economics of these items change as you find more and more scale. All of a sudden, when you control demand, you start to get more opportunities at slices of a larger business. It is a trillion dollar industry, Opendoor is just doing the hardest part first.

Forecasting a Storm of Bullshit

I’ve got a fundamental investing idea that forecasts are bullshit. Just people making shit up, pretending they know what the future will bring. I believe in data and love using it, but forecasting is inherently a lot harder than most people realize. Is Opendoor a company that fundamentally relies upon forecasting?

This is Opendoor’s CFO talking about some of the chaos that they’ve been hit with. 40 years of movement into a single quarter is a lot, but I do think this commentary makes it clear… the algorithm is only as good as the data it is working off of.

The problem with forecasts is that chaos is inevitable, yet terribly hard to predict. So forecasts generally don’t account for the chaos. It’s impossible not to forecast, but building your business around forecasts (and tying your P&L to it) just isn’t my style of investing.

Closing the Door

When you see a company taking a free dive like this, sometimes it’s tempting to catch the falling knife. I’ve historically made this mistake, but now I am waiting a little more patiently, especially when I see some red flags. If you see any red flags, just step back and let time be an asset, not a liability.

Opendoor has a number of red flags (forecast liabilities, unhinged investors and questionable economics). I want to love Opendoor (industry is ripe for disruption, super user friendly company, aggregating demand, etc…), but when the core of your business is based on forecasting a volatile industry, I just can’t to do it. I do think Opendoor is an interesting company with a ton going for it, but I’ll keep being patient and watching the core business. Maybe over time, they evolve as a company. I want to see Opendoor succeed, but for now the stock will be thrown in the watch pile with DoorDash and Netflix.

Author: fatbabyfunds