Good morning,
I lost track of the fact that last Thursday was a federal holiday; in case you missed it, I wrote about Nvidia’s GTC keynote.
On to the update:
Opendoor Earnings
From CNBC:
A week after Zillow announced its sudden departure from the home-buying market, rival Opendoor reported third-quarter results that topped estimates and issued an optimistic forecast for the rest of the year, sending the stock soaring in extended trading. Opendoor jumped 16% after hours to $22.48. Prior to the post-market rally, the stock was down 1% for the year.
Revenue in the quarter climbed to $2.27 billion from $338.6 million a year earlier, when the Covid-19 pandemic put a temporary freeze on transactions. Revenue was up 91% from the second quarter, and exceeded the $2.01 billion average analyst estimate, according to Refinitiv.
Founded in 2014, Opendoor pioneered the instant-buying, or iBuying, home market by allowing homeowners to sell their home for cash without listing it on the market and dealing with a lengthy bidding and closing process. The company went public in December through a special purpose acquisition company. Zillow started testing the iBuying market in 2017 and jumped in big two years later, when it began buying and selling in Southern California. The business worked initially, but hit major snags this year as massive swings in home prices undermined Zillow’s predictive models and ultimately left the company spending more on properties than it could make selling them.
Zillow shares plummeted 25% after the announced departure from the market last week, and the company said it’s eliminating a quarter of its workforce. The stock has lost over two-thirds of its value since peaking in mid-February.
This is the bookend to the two | pieces I wrote about Zillow exiting the home-buying business. The big question in the space is whether it is fundamentally flawed or if Zillow was simply not good enough at what is a fundamentally different business model than their core Aggregation business, and while these results don’t necessarily answer the first question, they do strongly suggest the answer to the latter is yes. To put it another way, the question is whether the appropriate conjunction in the two part question is “and” versus “or”, and in this debate the earnings call was an implicit dunk on Zillow’s approach.
Opendoor’s Pricing
The biggest focus of the call was Opendoor continually reiterating that the company has been focused from the very beginning on pricing; this bit from CFO Carrie Wheeler’s prepared remarks was clearly meant to highlight how Opendoor differed from Zillow and its ability to handle rapidly changing housing prices:
In Q1 and Q2, our margins outperformed these levels for 2 primary reasons. One, as we exited 2020, with very low inventory levels, our resale mix was heavily over-indexed to recently acquired homes. And two, we’re deliberately a bit conservative and how much HPA [Home Price Appreciation] we embedded into our pricing in the early part of the year, particularly as HPA accelerated throughout Q1. We saw both of these temporary factors begin to unwind in Q3, in line with our internal expectations and the guidance we provided last quarter. We expect to be back to operating within our 4% to 6% target margin range in Q4. Over the long term, we believe this moves to 7% to 9%, as we continue to grow our services revenue and margin streams.
One additional note on unit margins, given the news of the last few weeks, we understand the importance of one, forecasting, and two, managing seasonal and macro market changes. We have prioritized our investments in our pricing capabilities across acquisition valuation, forecasting, and resale systems since our inception. These investments payer with a strong risk management D&A that’s embedded in our pricing, our operations, and our finance teams.
In short, “We saw coming what killed Zillow.” To that end, that last sentence is worth doubling down on; it’s a theme Wheeler came back to in the Q&A:
I’m happy to give you some more color on [our risk management]. As you said and you highlighted our remarks, it really is part of our DNA. We spend as much time on the risk management side as we do thinking about the acquisition side, obviously those two things are paired together. We’re constantly looking at cohort performance and making sure that they are performing in line with where we expected. We hold our own feet to fire on that every day. We’re not just looking at geographies, Ryan, but we’re looking at home segment, on price segments.
You name it to understand, relative to the expectations we had, how are they performing over time? And that feeds into our ability to forecast and manage to the margin ranges we have. We have a big team, a very smart people, who spent all their time in this topic of pricing and investment lead by our Chief Investment Officer. But the ownership for risk and the risk management system’s really extend beyond that. It’s core to not just the pricing team.
Our offer team is held accountable for managing homes and risk. Our finance team thinks about, certainly capital markets. We meet regularly on topic of risk management at the very senior levels of the Opendoor management team, and then down from there. It’s really core to what we do, and it’s just part of our daily operating cadence, it has to be.
This is another angle on the advantages that Opendoor has over Zillow by virtue of home-buying being their only business; this not only means that Opendoor can stomach the risk, but also it means that their entire company can and should be preoccupied by said risk.
Opendoor’s Scalability
Two additional points on the more generalizable question of focused entrants to a market competing with Aggregators. The first is the question of customer acquisition: this is the big advantage of an Aggregator, in that they already have the eyeballs, and can, at least in theory, have a big advantage in directing those eyeballs to their own solution. What Opendoor has shown, though, is that that advantage exists at the beginning of a new market, but it doesn’t necessarily persist. CEO Eric Wu said in his prepared remarks:
We launched 5 new markets in Q3, bringing our total footprint to 44 markets, more than doubling our market count year-to-date, and ahead of our 2021 forecast. With our growing footprint, we are already seeing the benefits of increasing scale in driving awareness and operational efficiency, which further reduces the cost and efforts to launch more markets. Upcoming, we’re laying the groundwork for continued expansion next year and well on our way to our long-term goal of servicing customers in every market nationwide. Most importantly, we continued our investments in building the digital one-stop shop for movers. There, the generational shift happening from offline to online, and we intend to capture this opportunity.
This is kind of obvious, but worth noting: the more customers that Opendoor serves, the more efficiently it can reach and convert new customers, thanks not only to increased word-of-mouth but also an increased understanding and ability of how to reach potential customers. This matters both locally within markets and also nationwide.
Secondly, the longer that Opendoor is in a particular market the more it can increase its reach within that market; this is the expansion of the so-called “buy box”, that is the kind of houses for which Opendoor is prepared to make an offer. Wheeler noted that more than 45% of the homes that Opendoor acquired in Q3 came from the expansion of the company’s buy box.
On one hand, this could be viewed as Opendoor increasing its risk profile as it buys houses it wouldn’t have originally bought a couple of years ago; on the other hand, this could just as easily be interpreted as an affirmation of the company’s accuracy in pricing. If you are bad at it, it spirals in the direction of more and more mis-priced assets; if you’re good, it spirals in the direction of more data leading to more houses leading to more data.
We will, to be sure, need to see Opendoor weather a truly down market to see if this model is sustainable; for now, though, score one for focused startups overcoming incumbents chasing adjacent markets.
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