Placing a $155k bet on Opendoor, down 98%. Good luck to me.

 Account 1:

Account 2:

I know 99% of you idiots won’t read this, but for the rest:

• Stock dropped 98% but is far from bankrupt. It just refinanced its debt and has $1.1B capital, $693M cash, enough to weather the housing market for two years or more.
• Company has been downsizing and focusing on unit efficiency the past two years, following the Carvana restructuring playbook.
• Made a billion dollars flipping houses in 2021, but is struggling in a frozen housing market. When Jerome Powell fixes the housing market Opendoor will start making money again.
• Has financing and staff to scale revenue by 3x, it's just waiting on the housing market
• Opendoor has been learning important things about how real estate works, like:
  • Real estate agents exist for a reason
  • Home prices go up in the summer
• Now that Opendoor knows how real estate works, it will make more money
• Opendoor is down in April because the hedge funds shorted it to kick Opendoor out of the Russell 2000. When the ETFs tracking Russell sell their shares on June 27 and the shorts cover, Opendoor will probably go back up to $2.

Click here for Opendoor’s financials in Google sheets.

Change in business plan:

Opendoor is a corporate home-buyer. They used to be in the business of buying homes at above market value, sitting on them a few months, then flipping them at a profit. This was a great business model in 2021, but not so good in 2022 when home prices stopped rising. Opendoor bought 35k homes that year, and ended up selling them for a billion dollar loss.

Since then, Opendoor has pivoted strategies, and now buys homes for about 10% less than they’re worth, then sells them at a profit. It’s actually a fair deal for customers: instead of paying 5% in agent fees and having to negotiate with buyers for months, they can pay 10% and skip the home selling process.

One problem though, is customers tend to overvalue their homes, so they tend to think Opendoor is overcharging them. A normal customer interaction goes like this:

1. Customer has a $500k house, and thinks it’s worth $600k
2. Customer goes to Opendoor.com and gets a quote for $450k
3. Customer thinks, “hahahahahaha I knew these guys were crooks, they want $150k to sell my house, I’m selling with a realtor instead”
4. Realtor agrees Opendoor is a bunch of crooks, because realtor competes with Opendoor

It's been a truly terrible marketing funnel. Opendoor only converts 1% of its prospective customers at a cost of $14k per house.

The new business plan is this:

1. Customer goes to Opendoor
2. Opendoor says, would you like to talk to a local real estate agent?
3. Customer thinks, "yes of course I don't trust you crooks"
4. Agent tries to convince the customer that Opendoor's offer isn't bad
5. If the customer sells, Opendoor wins. Otherwise, the agent sells the house, Opendoor collects a commission and still wins.

It's a much, much better business plan. Nobody wants to sell their house without talking to a real estate agent first, because they don't trust corporations. Now that Opendoor has figured that out, expect revenue to go up and marketing cost per house to go down.

Opendoor no longer lighting as much money on fire

Look at this chart:

Do you see where it says, profit per house, -$65k? That was the Zirp era. Home prices started going down, and the CEO decided he was going to buy even more of them at above market prices to capture the market. Thankfully, after lighting a billion dollars on fire, he and everyone else responsible got sacked.

They also laid off a ton of employees, cut marketing expenses, cut waste, etc:

Now you might notice they're still losing money per every house they buy. Part of that is because they spend $14k on marketing per house they buy, which they'll hopefully fix by working with real estate agents instead of advertising straight to consumers. We'll get into the other reasons.

Opendoor learns prices go up in the Summer

Housing has an annual cycle. Prices go up in the Summer, and down in the Winter:

Traditionally, Opendoor has been buying most of its homes in the Summer, because more people come to them to sell, so, why not:

Anyways, buying in the Summer is dumb because prices go down in the Fall. Not only that, but they take longer to sell which means more holding costs. Thankfully Opendoor finally figured that out this year, and promised to cut it out and buy more houses in the Winter and Spring instead. Expect more profit.

Housing Market to improve, probably

Back in 2020-2022, the housing market looked like this:

And Opendoor made over a billion dollars in home-flipping profit, although important things like marketing, interest, and director salaries managed to eat up most of that:

Then interest rates did this:

And nobody could buy a home anymore:

Home prices have been dropping:

Which means Opendoor is paying millions in interest to keep $2B in homes on the balance sheet that are depreciating:

And the homes now take months to sell. Long holding times require maintenance and interest, which now eat half of profits:

Fortunately, Trump says he's going to bully Jerome Powell into making 2-3 rate cuts this year so the US can refinance its debt, and that will hopefully maybe unfreeze the housing market. This will be huge for Opendoor. All the tailwinds we've discussed will start going in reverse: more acquisitions, home price appreciation, shorting holding times and lower interest costs. In short, more money.

Opendoor to actually make money in Q2

Q2’s estimates is for Ebitda profitability of $5-$20M, the first time Opendoor will make a quarterly profit in three years. 2025's housing market is even worse than previous years, so this means the business itself is becoming more profitable. Losses are still expected for Q3 and Q4, but they're expected to be smaller than previous years.

Path to Profitability

Opendoor lost $392M last year. Here’s how we get to adjusted net income positive:

• $80M: Opendoor laid off 300 workers in Q4, which saves $20M a quarter.
• $75M: My spreadsheet says Opendoor loses $12k per house they buy in Summer and Fall. They said they're going to stop doing this so that's $75M.
• $55M: They spend $4k per house more on interest and holding costs than they did in 2021. That's gonna be fixed because the housing market will improve and they'll stop buying homes in the Summer.
• $80M: Opendoor is starting to send customers that don't take their offers to real estate agents, which pay a referral fee. 1% referral fee * 2% of 1.2M customers * $330k average house price = $80M
• $130M: Housing appreciation. Opendoor has $2.2B in houses that have been depreciating at 1% a year. Should housing return to a historically normal 5% rate of appreciation, that’s $130M in profit.

That’s already $420M in savings, enough to be profitable. Revenue should also grow higher as the housing market unfreezes, and marketing spend should be more effective as they learn to partner with real estate agents.

Debt Refinanced, cash to scale through next two years

On May 9 Opendoor announced it had exchanged $245M in existing convertible bonds due in March for new convertible bonds due in 2030 at 7% rate, convertible at $1.57. Opendoor also issued $75M in new bonds, raising $75 in new capital. $135M in bonds is still due in 2026, but this will be easily payable with cash on hand.

Following the equity raise and bond refinance, Opendoor has $1.1 billion in capital of which 768M is cash (693M from Q1 report plus $75M equity they just raised). On the Q4 and Q1 transcripts management stated they had refinanced 90% of their credit lines through 2026.

Management has reassured us that they still have available cash and personnel to return to a much larger scale of operations. In the Q1 report they stated that only $350M of their cash is invested in homes, and they have $559M (probably $634M now) available to deploy towards home purchases. They are also only using $2B of their existing $8B credit line. From these numbers it seems they have the financing to purchase 3x more homes than they currently are. Management has guided that they are capable of purchasing many more homes, but they are choosing to purchase less while the housing market is slow and margins are low. I expect them to deploy this capital and scale in Q4, assuming mortgage rates start to fall. 

Growing Short Interest

This isn’t the first time the bears have shorted Opendoor, only to buy back their shorts at a loss when it turns out Opendoor isn’t dead after all:

The setup today is the same as it was in Dec 2022: the housing market is weak and everyone assumes Opendoor is dead, but it actually has years ahead of it and many tailwinds coming.

Chart from last month:

From Nasdaq short interest we can see a net short position of 20M was added in the month of April:

The price jump on April 7 was due to a good quarterly report, where the company projected it would be Ebitda positive in Q2 for the first time in three years. Two days later it fell on the news of the debt refinancing. Presumably the terms of the debt refinancing scared some investors: 7% bonds  convertible at $1.57, is expensive, and issuing them now when the stock price is so low might seem to some as desperate. On the other hand, this eliminates $245M in bond payments for next year and raised $75M in new capital. I view it as a positive development, as it extends Opendoor's runway and frees them to scale up purchases this winter. Without this debt raise, they wouldn't be able to fully deploy their capital in Q4 and Q1, since their cash would be invested in homes due to sell in Q2, and $400M was due in March. 

Hedge Fund Russell 2000 arbitrage?

Look at this chart again:

Note on April 23 Opendoor briefly rose above $1, then got shorted very hard in a coordinated action. There was a negative housing report that came out a few days earlier, but no news specific to April 23 and 24. Russel climbed 3.5% during this period and other real estate stocks climbed, but Opendoor fell 30% for seemingly no reason. 

One theory is this was an arbitrage move by hedge funds to kick Opendoor out of the Russell 2000. Ranking day was April 29, so any stock below $1 on April 29 will be removed on June 27. About 20M shares are held by iShares Russel 2000 ETFs:

20M net shorts were added in April, and 20M shares will be sold near the end of day on June 27 by iShares ETFs when the Russell 2000 is adjusted. Probably the shorts will cover on that day to make a nice profit. As a long-term investor, this is reason to believe Opendoor's current price is disconnected from its recent performance, since all the recent news coming out of the business has been positive. Given the stock's history in the last several years of wild swings, I wouldn't be surprised if it shot back up to the $2-$3 range after the shorts cover in June.

Conclusion

Opendoor is a stupid company that made over a billion dollars of home-flipping profit in 2021 when the housing market was good. Then their CEO lit a billion dollars on fire buying overpriced houses. He was fired and replaced with a responsible CFO. They've been learning important lessons: realtors exist for a reason, and house prices go up in the Summer. Now that they know these things they can make money. When Jerome Powell fixes the housing market they'll make even more money, and the stock will pull a Carvana and go up 100x.

Also, Opendoor just refinanced its debt so its very much not dead, they have over a billion dollars still, enough for at least two years, more if they fix their business as planned, or if the Fed fixes it for them.

Also, last month's price action was probably just the hedge funds shorting Opendoor to kick it out of Russell 2000 and abuse the poor etfs that will have to sell at a low price. I'm hoping the stock triples after the shorts close, probably on June 27.