Opendoor's Opportunity

Now that Zillow folded its iBuying business, where does that leave Opendoor? Is Opendoor positioned to dominate iBuying going forward?

In 2018 Zillow announced its entry into iBuying through its program called Zillow Offers.

Zillow's vision: To make selling a home as easy as ordering an Uber.

In May 2019, I wrote a bullish piece on Zillow's iBuying program. But I pointed out two risks:

  • First, can it buy and sell homes during both up and down cycles?
  • Second, can it manage the hundreds of thousands of contractors it will need to conduct the necessary repairs?

I think I was mostly right.

Last week, Zillow announced it's shutting down its iBuying program, saying:

"unpredictability in forecasting home prices far exceeds what we anticipated.”

As a result, Zillow will cut its workforce by 25% and expects to lose around $550 million on homes it had bought.

What does this mean for Zillow's biggest iBuying competitor, Opendoor ($OPEN)?

I've read some commentary on Twitter around Zillow's decision to shutter its iBuying program, and people seem to think it means the whole category is in trouble.

Keith Rabois, one of Opendoor's co-founders, said this in response to a comment about iBuying being a crappy business.

What's Opendoor's ceiling?

Typically, there's an analog when trying to guess a young company's ceiling (best case scenario). For example, you can look at a public company in the same space and say: "if this company executes well, it can eventually be as big as company X."

For example, Dutch Brother's ($BROS) is a physical coffee shop business that recently went public. Today, its valuation is ~$12 billion. If everything goes right, it gets a few breaks, and it differentiates itself somehow, maybe its ceiling is Starbucks ($131 billion market cap) or half of Starbucks.

The point is: there's a clear comp to Dutch Brothers.

There is no clear comp for Opendoor. Its biggest competitor just folded.

It has a chance to own the iBuying category.

And unlike Zillow, its existence is based on them being good at buying and reselling houses. Because if it's not, its whole business goes away.

Opendoor believes that we are in the early innings of the secular shift from consumers buying real estate offline to online.

Here are two numbers from the NAR that show how much market share is up for grabs:

  • In 2020, 89% of sellers were assisted by a real estate agent.
  • And, FSBO (For Sale By Owner) was 8% of home sales in 2020.

Ninety-seven percent of homes sold in 2020 were either sold via an agent or FSBO.

Again, a lot of potential market share for iBuying to seize.

The bottom line

I don't know if Opendoor will be successful. But, if iBuying as a category turns out to be a big thing, I think Opendoor will be a home run.

I wouldn't be shocked if its market cap hit $50, $75, or $100 billion in a decade, (Its current market cap is ~$13 billion).

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