OpenDoor is revolutionizing the real estate market with its new model. It buys houses and sells them on its platform.
Zillow’s abrupt exit from the home market means that investors see an opportunity for Opendoor.
A day after Zillow stock fell to a 16-month low, Opendoor stock rose as much as 19%. The San Francisco-based company, which went public through a dedicated acquisition company late last year, pioneered the buy-it-now (or iBuying) market, allowing homeowners to sell their property online for cash rather than an extended tender and closing process.
Opendoor is expected to release its third quarter results next Wednesday to give investors a clearer picture of how the company handled the price volatility that caused Zillow to take a massive write-off, lay off 25% of its employees and concluded that it could no longer justify buying and selling houses.
Eric Jackson, president of EMJ Capital and an open-door investor, equated Zillow’s move away from buying it now with a number of internet companies deciding to give up search two decades ago, removing Google’s biggest competitive threats.
“Giving the market to OPEN is like giving up the search in 2001 to the Yahoo / Ask Jeeves / Lycos / Excite equivalent,” Jackson tweeted Thursday. In a direct message to CNBC, he said that Opendoor’s advantage is solely in “data data”.
Opendoor’s stock surge wiped out almost all of the losses it suffered earlier in the week when it fell alongside Zillow. Investors are betting the market is viable, but that Zillow, who grew up as an Internet home sales marketplace, was ineffective in an entirely different business. Opendoor, on the other hand, was specially developed for buying and selling houses.
Opendoor is now up for the year and is valued at nearly $ 15 billion, while Zillow’s market cap has dropped from a high of about $ 50 billion in February to just over $ 17 billion.
Some analysts praised Opendoor’s expertise before Rich Barton, CEO of Zillow, said Tuesday that his company was “unable to predict future house prices at different times in either direction much more accurately than we can have modeled “.
Zillow paused new purchases last month due to a so-called “backlog of renovations and operating capacity constraints.” The stock fell nearly 10% on October 18, the day it was announced.
The buy-it-now market is particularly sensitive to price volatility, labor costs, and supply chain issues as participants need to be able to sell homes for a profit after taking into account remodeling and maintenance. Zillow said the rising labor and material costs associated with the pandemic, coupled with the volatility of home prices, had proven the company’s pricing model to be ineffective.
Opendoor was up 3.1% on the day Zillow announced his hiatus. BTIG analysts wrote in a report that Zillow “may have been a step ahead on inventory levels” while Opendoor has apparently moderated its activity “by recalling purchases”.
“Instead of accelerating into softer conditions in September, OPEN appears to have adjusted,” wrote BTIG analysts, who have the equivalent of a hold rating on the stock. They pointed to an industry report that showed that Zillow picked up its Phoenix purchases in August and September at a rising price while others in the industry declined.
In a customer note on Wednesday, JMP analysts downgraded Zillow, although “we expect iBuying to take a stake in residential real estate transactions” as the model becomes more mainstream. They named Opendoor and its smaller competitor Offerpad as companies that could benefit from it.
Offerpad, which went public through a SPAC this year, rose 5.7% Thursday, although the stock has still been in the red since it started trading in September.
Barton was asked Tuesday by CNBC’s “Closing Bell” whether Opendoor is making a mistake by sticking with iBuying.
“I can only speak with our calculation, I cannot speak with the calculation of others,” said Barton. “It’s different for us with this step. Our calculation is different, we are scaling back down to the bigger seller problem, ”he said, adding that Zillow is switching back to an“ asset-lite ”model.
SEE: Zillow CEO on leaving the home flipping business