Opendoor reported its Q4 and full year 2021 earnings last Thursday, and I needed to take some time to think through things.
Long story short, Opendoor blew the doors wide open with its performance. It has replaced Redfin as the most important company in residential real estate, and it’s on the heels of Zillow to be the new frontrunner for the Iron Throne. And while Eric Wu really talked down the whole competition angle with Zillow exiting iBuying thing, I can’t help but feel that Opendoor’s results showcase just how big a strategic misstep Zillow’s withdrawal was.
Overlaying Opendoor’s performance with that of more traditional companies like Realogy, RE/MAX and even EXP to some extent, as well as former disruptors like Redfin is what’s difficult. I’m thinking through that.
But in the meantime, this report is filled with subtle clues that are worth investigating. Let’s get into it.
The Numbers
I actually don’t know how much value there is in my looking at the numbers, unless there’s something there that traditional Wall Street analysts typically can’t and don’t see. But the numbers were so… astonishing that they deserve at least a mention. From the press release, talking about the full year 2021 results:
- Total revenue of $8.0 billion, up 211% versus 2020, with 21,725 homes sold, up 119% versus 2020
- Gross profit of $730 million, up 232% versus 2020; gross margin of 9.1% versus 8.5% in 2020
- Net loss of $(662) million, versus $(253) million in 2020, primarily driven by non-cash stock based compensation of $536 million versus $38 million in 2020
- Adjusted Net Loss of $(116) million, versus $(175) million in 2020
- Contribution Profit of $525 million, up 377% versus 2020; Contribution Margin of 6.5%, versus 4.3% in 2020
- First year of positive Adjusted EBITDA of $58 million versus $(98) million in 2020; Adjusted EBITDA Margin of 0.7% versus (3.8)% in 2020
- Purchased 36,908 homes, up 498% versus 2020
- Launched Opendoor Backed Offers, which provides homebuyers with the benefits of an all-cash offer when they bid on their dream home, and Opendoor Complete, which brings together all of Opendoor’s products and services into a single, streamlined experience
- More than doubled market footprint to 44 markets
- Expanded buybox coverage by 50% versus 2020, enabling us to offer on over 60% of all transactions in our active markets
- Real seller conversion of over 35% with record offers, up 590% versus 2020
- Maintained seller Net Promoter Score of above 80
I’m sorry, just about every bullet point is a tug-at-your-jaw item. I’ve highlighted parts that made me tug my jaw. Eric Wu appropriately crowed in the earnings call:
In the last 12 months, we generated $8 billion in revenue, representing over 200% growth versus the prior year. We delivered $525 million in contribution profit, up nearly 380% year-over-year. And on top of this growth in revenue and unit profits, we booked $58 million in positive adjusted EBITDA, up $156 million from the previous year.
These financial results pulled forward our financial targets by years, significantly outperforming the ambitious expectations we set for ourselves across our key metrics. This tremendous growth was the result of focused execution and investments in our consumer experience, our consumer growth and our technology, pricing and operations platform.
Well yeah, if you grow revenues by 200%, profitability by 380% and EBITDA by $156 million, I think you deserve to brag a bit. By just about every financial metric, Opendoor outperformed… and by a lot.
Who to Believe: Wu or Barton?
The first and most obvious observation is that either Eric Wu is wrong or Rich Barton is wrong. They’re both very smart men with very deep experience in real estate, finance, and technology. So the question is, whose take do you believe?
Back in Q3 of 2021, when Zillow pulled out of iBuying, Rich Barton talked about how Zillow couldn’t accurately price homes and stated:
Because of the price forecasting volatility, we have also had to reconsider what the business would look like at a larger scale. We have offered sellers a fair market price from the start, but we’ve also been clear that the business only becomes consistently profitable at scale. With the price forecasting volatility we have observed and now must expect in the future, we have determined that the scale would require too much equity capital, create too much volatility in our earnings and balance sheet, and ultimately, result in a far lower return on equity than we imagined.
Eric Wu on the Q4 call says:
Last but not least, our core technology, pricing and operations platforms dramatically improved last year. We made improvements to our home operation system, Opendoor Scout, as well as the virtualization and centralization of multiple labor processes. This has resulted in our ability to deliver 3x more home assessments and repairs, with a similar level of operational staffing at 2 years ago. This also enabled significantly faster turnaround times and over 170 basis points of cost structure improvements.
We continued our investments in pricing as our pricing system is our secret task. We analyzed hundreds of data points about each individual home we assessed, and we ingested millions of new data points, including image data and demand signals. This work led to a significant reduction of pricing variance and the expansion of our buybox by over 50%.
If you side with Barton, then you have to think that Eric Wu is spinning fantasies about algorithmic accuracy, risk management, and operational leverage. None of that can ever improve enough to deal with price forecasting volatility, which means far too much capital, too much volatility in earnings and balance sheet, and so on. This is one reason why segments of Wall Street cheered when Zillow exited the “high risk loser” iBuying business.
If you side with Wu, then you have to think that Rich Barton was blaming algorithms for operational incompetence. That in fact, the problem isn’t with technology or pricing, but with operations. If you think that Business Insider’s reporting on Project Ketchup was accurate, then I think you have to lean this way.
I find myself leaning towards Wu’s narrative, in large part because of Opendoor’s 2021 and Q4 performance. Volatility doesn’t cut only one way — price volatility means up and down, not just down. Bitcoin is down 40% from its all-time high in 4 months; that’s volatility. But Bitcoin is also up 60,551% from its all-time low; that is also volatility. You’re hating Bitcoin if you bought at $68K and it’s now sitting at $41K, but you’re loving Bitcoin if you bought it at $5,500 in March of 2020.
Managing that volatility is the key, and at least throughout 2021, Opendoor has managed that volatility. What’s more, there are real suggestions that Opendoor can manage that volatility going forward. From the earnings call, there’s an exchange between Carrie Wheeler, CFO, and Ryan McKeveney of Zelman & Associates. It’s technical financialese, but the two important takeaways are (1) Carrie Wheeler pointing out that inventory impairment is a crappy metric for Opendoor, and (2) Wheeler saying Opendoor looks at inventory like a traditional asset manager might — as a portfolio:
Impairment is an accounting standard, and it’s not a good measure of overall portfolio performance for us, when we are really managing our business more like an asset manager because it’s just taking down the things that are negative, and it doesn’t actually do the reverse, which is mark up the things that are positive.
So it’s a measure that we will provide consistently because we’re required to by GAAP. It’s not a very good measure of how we’re performing. The ultimate measure should be in CM and then we’ve given you this new inventory metric.
and
I mean I think [market expansion] falls within the risk management bucket, as you said. I mean one of the beauty is that it continued to expand in terms of scale and a number of markets is the benefits of diversification relative to overall risk management. We really do manage the portfolio on an aggregate basis across all our markets. And so we see the benefits of diversification by geography, by home types, and by what may be going on in an individual market when we can weave it across 45 and counting.
The first point is that inventory impairment only looks at downside volatility, whereas volatility is both up and down. So Wheeler’s point is that Wall Street wants to focus only on inventory values going down by 20% or whatever, but not inventory values going up by 20% (and housing went up 18% last year).
The second point is that Opendoor looks at its inventory as a portfolio of properties, across markets, across home types, and across price bands. They’ll dump the losers, max out the winners, and end up ahead on a portfolio basis. Plus, Opendoor is not a vending machine that can’t make adjustments. They’re smart operators who know how to take changes into account. Wheeler is asked about interest rates going up, and how that might affect Opendoor. Her response:
The first part of that interest rates and the impact to us headline is that we do expect rate increases, but we expect the impact to our P&L to be quite manageable. We’re modeling an increase in our unit costs at approximately 20 to 30 basis points over the course of the year, and that’s a relatively small impact to our overall cost structure on a per home basis. And moreover, we embed those costs in our offers. And so we’ll look to pass it on to the consumer.
So if rates spike up, and Opendoor’s acquisition costs go up, then Opendoor will “embed those costs in our offers” and pass them on to the consumer. It isn’t as if Opendoor will be the only buyer who has to deal with higher rates.
The Unfair Advantage
The larger point, I think, is that Opendoor’s core business of creating liquidity in homes is an unfair competitive advantage vis-a-vis Opendoor’s true competition: the 99% of sales that are happening traditionally. Eric Wu makes this point repeatedly. And in 2021, Opendoor added its bridge loan model product, the so-called “power buyer” thing, called Opendoor Backed Offers which lets buyers offer cash in a highly competitive market. Of course, they brought the two together with Opendoor Complete, about which Eric Wu said:
With our launch of Opendoor Complete, we combined 2 lengthy and disparate processes of selling your existing home and buying a new home into one simple experience. This is so impactful because it gives our customers control of their moving timeline and eliminates costly double mortgages and costly double moves.
This is an unfair advantage versus traditional list-and-sell process. No matter how great your agents are, if you list and sell your home the traditional way, there is no guarantee that you’ll find and close on your next home with any kind of certainty. Wu says as much:
The last thing I’d add to that is we see the growth with sellers and the amount of customers coming to Opendoor for our solutions as an indication of the strength of our product market fit. The alternatives are to list and sell and that clearly is not a challenge, but people are still choosing Opendoor because of what we’re providing in market.
The numbers bear out this confidence. As the Q4 Shareholder Letter states, Opendoor sold 9,794 homes in Q4 and bought 9,639. For the year, Opendoor bought 36,908 homes, up 500% YOY. They did that in the hottest seller’s market in history. Part of that is straight growth, as some 500K homeowners requested an offer from Opendoor, and a part of it is rather interesting:
We also saw significant increases in customers from reengaging homeowners who registered in previous years, who were not yet ready to move, and this resulted in almost 30% of our acquisitions.
So people registered, sat on it, maybe even requested an offer and turned it down… a bunch of them came back to Opendoor and sold. 30% of the 37K homes, or almost 12,000 homes, that Opendoor bought in 2021 came from these people. That’s a fascinating factoid.
Long and short of it is that Opendoor’s value proposition is resonating more than ever. Turns out that even in the hottest seller’s market in history, since most sellers also have to buy a new place to live, Opendoor is getting traction with more and more of them. I’ve long been bullish on iBuying, whether market maker model or bridge loan model, because it is superior to the current traditional transaction process. Everything I saw and heard from Opendoor confirms that bullish outlook.
Strategic Outlook
There is one aspect of this which is fulfilling what I saw as the strategic advantage of market maker iBuying. Let me let Eric Wu explain. From the Shareholder Letter:
Having a unique supply of homes to sell is a tried and true formula to attract home shoppers, driven by having an online presence and offline signage and tours. Said another way, we are able to successfully aggregate home shopper demand by having homes for sale with little to zero marketing cost. Furthermore, given two-thirds of sellers are also buyers, we have already acquired a large base of prospective home shoppers. With this demand, our goal is to build a differentiated product, similar to our Sell to Opendoor product, that delivers superior simplicity, certainty, and speed as compared to the traditional process. Last, we know that when a buyer chooses to buy with us, we are able to attach a range of services due to increased simplicity, convenience, and cost savings. [Emphasis added]
In 2019, when he returned as CEO and launched Zillow 2.0, Rich Barton famously called Opendoor “an existential threat” to Zillow. This is why: a unique supply of homes leads to aggregating buyer demand. Buyer demand leads to sellers wanting to be on that platform. Sellers providing unique supply of homes leads to aggregating buyer demand. And the virtuous cycle revs up.
In a different form, we see this dynamic play out in how NAR’s Clear Cooperation Policy simply leads to more consolidation, bigger brokerages, and more dominance by agent teams. I pointed this out in 2019 talking about the proposed CCP:
Buyers sign up for your emails out of fear that they might miss out on an exclusive. You use this database of buyers to recruit agents, who fear that they might be missing out on leads and worry about competing against your agent who can walk into a listing appointment talking about the 5,000 buyers you have in your database. Those agents bring listings with them, which you use to begin the cycle again. This “network effect” is the superpower that Andrew Flachner so eloquently outlined in his post about using buyer data and exclusive listings to gain a competitive advantage.
What works for Compass also works for Opendoor, except better since Opendoor can pony up an actual cash offer that Compass cannot.
Today, Zillow is the dominant aggregator for buyer demand. Even after exiting iBuyer, Zillow still has the largest portal by far. Zillow 3.0 explicitly attempts to leverage that buyer demand aggregation for its housing super-app, which will eventually touch every aspect of the transaction.
What is the future of that strategy if Opendoor ends up with dominant shares of unique supply of homes? Or at least a big enough chunk that buyers end up going there to get access to the unique supply of homes? All that Opendoor has to do then is not charge 40% referral fees to their partner agents and it becomes far more attractive to sundry real estate agents who are currently Zillow Premier Agents.
The existential threat did not go away because Zillow left iBuying. If anything, the existential threat has intensified, as Opendoor’s most serious competitor no longer exists. Maybe Redfin and Offerpad and others can pick up the slack that Zillow’s exit left in the market, but… boy, the moat is deep and getting deeper. Opendoor is laser-focused on the core pricing technology, on field operations (repairs, etc.), and have a lot more cash than anybody not named Zillow. As Carrier Wheeler put it, Opendoor has $2.2 billion in cash, financing for some $10 billion in inventory which translates to $30 billion in “home acquisition firepower.”
Compass famously talked about its flywheel: recruit more and better agents –> exclusive inventory –> exclusive buyers –> recruit more and better agents. Opendoor replicates the flywheel with: buy more homes –> exclusive inventory –> aggregate buyer demand –> buy more homes. Since cash money > agent headcount, I think Opendoor now has a strategic competitive advantage over every company in residential real estate.
The Buybox Expands
Finally, we have this astonishing report from the Shareholder Letter:
Next, in terms of cost, we drove significant operational efficiencies by investing in proprietary tooling, such as Opendoor Scout, and increased virtualization and centralization of local processes and labor. This has resulted in our ability to deliver nearly six times the home assessments and repairs, with significantly faster turnaround time to final offer, and nearly 110 basis points of operational cost structure improvements over last year. These improvements have also allowed us to efficiently scale the number of homes we service by over 250% from the prior year and expand our market footprint, doubling the number of our markets in 2021.
Last, we experienced multiple breakthroughs in our pricing processes where we analyzed hundreds of data points about each individual home, including proprietary labeling of millions of images, and leveraged both computer vision and AI techniques to assess each home’s value, condition and market environment. As a result, we were able to improve price competitiveness and increase our buybox by 50%, enabling us to offer on more than 60% of all transactions in our active markets.
Opendoor was asked about this during the earnings call. Andrew Low Ah Kee, President, answered:
So Ryan, Andrew here. 60% could it be more…. I would start by saying 60% is already higher than many thought we might ever be able to cover, decidedly not me. In principle, we should be able to cover the entire market. In practical terms, the effort to cover the range of tail scenarios that might exist out there, aren’t likely to be worth it. But certainly, we believe there’s room to continue to grow.
And then in terms of expanding the coverage more broadly, condos, townhomes, other types of properties. Again, we believe our investments in our pricing capability and the sophistication we’ve got there is going to enable us to continue to grow and expand our market coverage.
Opendoor is already making offers on 60% of the properties. Low Ah Kee makes it obvious that this limit is a practical one, about profitability of buying, rehabbing and selling properties rather than a technological one, or an operational one. He is decidedly not one of those who thought 60% was too high.
And so, Opendoor will look at going into condos, townhomes, and so on. This is a real market maker, or at least a company that wants to become a real market maker. They want to cover the entire country, and offer bid/ask spreads on every single property of every type, whether a condo or a beachfront mansion. Whether doing that is economically viable or not is a secondary question, in a way, since it seems clear that Opendoor can buy, rehab, and sell just about any home in America.
It was always a matter of time before technology and capital caught up with the transaction. Opendoor is (in their own words) years ahead of where they thought they would be. 60% is a significant milestone, and I think we’ll see that number go up over time.
Opendoor is a Head to Toe Player
I think what Opendoor showed with Q4 and Full Year 2021 results is that it is now a serious player in residential real estate. I actually think Opendoor is now the most important player in real estate, after proving that iBuying works, has enormous value to consumers, and is profitable. It is not yet the most powerful company in real estate, as that title still belongs to Zillow, but the strategic advantage of having a unique supply of homes will come to mean more and more as time goes by.
As Barton surmised in 2019, Opendoor is a dangerous company with some money in its pocket. And it has plenty of that today. The opportunities are vast: so many pretty homes around them to wake up the business rocket. It is still a risk on stock, in a rising interest rate environment, so I imagine Wall Street will keep punishing the stock price. But so what? The next verse belongs to the hustlas, gangstas and bad bitches… and today, there ain’t no bitch badder than Opendoor in real estate.
-rsh
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