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Opendoor Earnings: No yet an inflection point, one step at a time.
Situation Overview: Opendoor is the most prominent real-estate e-commerce platform in the US. Out of the $2 Trillion dollar real estate transactions in 2022, OPEN only accounts for 1% market share, leaving huge whitespace to disrupt. Over the past year, OPEN has been facing multiple headwinds including higher mortgage rates, home price corrections, inventory write down and tight real estate supply. The company is in the process of reducing inventory purchased in Q2 FY22 (referred to as “Q2 cohort”) at the expense of losing money on a unit basis to retrieve cash flow. It goes without saying that doing so weighs heavily on the company’s profit and comps. We are tracking the progress of the inventory reduction closely to monitor the overall health of Open’s profitability and liquidity.
Overall Thoughts on Q4 Earnings: Not yet an inflection point in the negative contribution margin or EBITDA margin. As explained in the situation overview, bad inventory has been dragging profitability so they would need higher volumes in good inventory to cover operating losses. Given the rapid cool down on the real estate market, there is not enough good inventory or purchase to help ease the bleeding (see chart below for listing expired and price reduction trend). On the liquidity front, the cash balance remains on the short side: $1.2B cash vs. $5B debt means it would be tough for them to scale up or turn around.
Financial Metrics Deeper Look:
Q4 Revenue of $2.86B, topping the $2.51B consensus, slid from $3.36B in Q3
Inventory: It had an inventory balance of 12,788 homes, representing $4.5B in value, vs. 16,873 homes at the end of Q3, representing $6.1B in value
The contribution margin continues to deteriorate significantly as the company reduces inventory. 2022 Q1 > Q4 CM trajectory: 6.4% > 10.1%> (0.7%)> (7.2%)
Adj. EBITDA fell behind guidance: came in at -350 vs. -345 mid point guidance in Q3.
Dragged by net inventory impairment (reduced from GM), representing -153M of EBITDA loss
Direct selling cost and holding cost
Outpace in revenue plus negative CM
Guidance: Rev in line-- Q1 revenue is expected to be $2.45B-$2.65B, compared with the average analyst estimate of $2.54B. Adj. EBITDA loss widens -$350M to -$370M, vs. -$246M Visible Alpha consensus
Key Development in Q4:
Over the 2H 2022, OPEN accelerated its resale velocity and realized lower acquisition volumes.
1. Trajectory of new house inventory acquired FY22 Q1 to Q4: 12,669 >10,482> 8,520> 7,512
2. Q2 cohort sold 2/3, expect to sell 85% by end of Q1 ,which could result in lower adj. EBITDA. Expect to be positive net income with $10B revenue in FY24.
3. Expect to turn contribution margin positive by 2H 2023 as new cohort kicks in and new cohort sold. Expect new cohort CM to be 4%-6%
4. Macro and Pricing strategy: There has been an increase in consumer housing demand in early 2023, which is above normal seasonality. Housing supply is tight with new listing new decade low. Mgmt Reduced spreads since December as the management believes they see leading signs of housing market price stability. They believe a lower spread could accelerate acquisition volumes.
5. Cost optimization: expect 100bps benefit in FY24 through scale-back operational efficiency, reduced marketing spending and headcount reduction
6. 3P is not going to be meaningful in FY23.
Conclusion: Overall, Opendoor has not yet reached the inflexion point in unit economics or company profitability. We expect a clearer picture to take at least another 1-2 quarters.
Chart of the Week in the Public Market:
Nasdaq had its worst week since 2023 as a result of reaccelerated PCE and hawkish Fed comment. We think this marks the beginning of multiweek's correction as the market wakes to the “higher for longer” reality.
Index continued to dip from 8.1x to 7.9x - by further dissecting the index composition by subcategory below, we can see that most of the subsectors have slid down to a flat or down YTD. Card Network, Remittance, and B2B Payment both are nearing the negative YTD territory. Bill’s price and multiple contractions led to much of the continued nervousness around the space. Consumer Fintech, surprisingly, is the one bright spot in the sector.
A slump in the market from 3.2x to 2.8x - with the correct over the past week, it’s interesting to see that Consumer, on a relative basis, still outperformed the bulk of Fintech and Enterprise companies. The strength in Gaming with a median 4.4x multiple stood out and continues to lead the pack.
(Market data as of 2/24/2023, source: Bloomberg, CapIQ. See index composition at the bottom)
Chart of the Week in Private Market
(Deal data as of 2/26/2022, source: Pitchbook. Defined as - Series B+ global growth stage deals)
Continued softness in the private market - at $6B, we are looking at roughly 20% of the volume of the November 2021 high. We continued to see low volume of the Series C+ large growth deal announcements while Series B seem relatively healthy regarding to the other stages.
Sources: Software Index: over 200+ public companies / Fintech Index: V, MA, PYPL, SQ, BILL, ADYEN, SHOP, LSPD / Consumer Index: ABNB, BMBL, CHWY, CVNA, DASH, DHER, DKNG, DUOL, ETSY, FB, FTCH, GDRX, GOOGL, MTCH, NFLX, OPEN, PINS, POSH, PTON, ROKU, SFIX, SNAP, SPOT, UBER, W. Please feel free to ping us for further detailed breakdown