This Stock Offers 500%-Plus Upside Potential

Shares of ibuying platform operator Opendoor (NASDAQ:OPEN) have been hammered amid the recent tech sector meltdown, as a sharp rise in long-term yields has put significant downward pressure on growth stock valuations. From its February highs, OPEN stock has dropped more than 40%.

That’s a steep drop in a high-quality hypergrowth stock like Opendoor. It’s also a great buying opportunity with 500%-plus upside potential in the long haul.

To be clear, I’m not saying OPEN stock will reverse course right now and surge over $100. The tech sector selloff is a bloodbath, and bloodbaths like this tend to take some time to shake out.

But, what I am saying is that Opendoor is an early-stage Amazon (NASDAQ:AMZN), with a breakthrough technology platform that will digitize the home shopping process over the next decade, much as Amazon has digitized the retail shopping process over the past decade.

Relative to the company’s huge long-term potential, OPEN stock is significantly undervalued today, much as AMZN stock was significantly undervalued a decade ago. Indeed, my numbers say shares are worth at least $40 today, and have potential to soar to $140 in the long run.

That means that for long-term investors, this is a generational buying opportunity in a generational stock.

Here’s a deeper look.

OPEN Stock: Hammered on Short-Term Fears

OPEN stock has been hammered over the past few weeks because of fears related to a sharp rise in long-term bond yields. The basic thinking is that, as long-term yields rise, equity valuations will correct lower, because stocks and bonds are competing investment vehicles, so as bond yields rise, the required rate of return on stocks rises, too.

That thinking makes a ton of sense. And if yields were to rise forever, then I’d say growth stocks like OPEN stock will keep plunging.

But yields aren’t going to rise forever. Instead, it looks like the 10-year Treasury yield will max out around 2% over the next few years.

Here’s the thinking.

Historically, the 10-year Treasury yield has very closely tracked the sum of the 3-Month Treasury yield (a proxy for inflation which the Fed controls with its target interest rate) plus real GDP growth. This relationship is unmistakably strong. Importantly, the 10-year yield has historically never surpassed the 3-Month yield plus real GDP growth unless during a time of significant economic contraction (and therefore, negative GDP growth).

Source: St. Louis Fed

The Fed has reiterated multiple times that they will not move on interest rates anytime soon. Thus, the 3-Month Treasury yield will remain near-zero for the foreseeable future. Real GDP growth is expected to jump to 4% this year in a sharp “bounce-back” year. But normalizing out for Covid-19 noise, real GDP growth in 2022 and after is expected to hover around 2%.

Thus, normalized, the 10-year yield should settle around 2% and remain there for most of 2022 and 2023. We are at 1.5% today. By my math, then, yields have another 50 basis points to go over the next 24+ months. That’s a slow and steady grind higher.

To that end, I think we’re close to the end of the surge in long-term yields. Once the bond market calms down, I fully expect growth stocks like OPEN stock to bounce back.

Opendoor Is Still Digitizing the $1.3 TRILLION Real Estate Market

Ignoring interest noise for a second, Opendoor is still Opendoor. That is, this is still a company that is in the early stages of digitizing and optimizing the $1.3 trillion U.S. real estate market — which, of course, is bullish for OPEN stock.

Home shopping — like every other shopping process — will eventually pivot online. With advancements in augmented reality and video technology to virtually view homes and artificial intelligence to dynamically price homes by just ingesting a bunch of comparable and visual data, the digital home shopping process — or “ibuying” — is now ready for the mainstream.

Over the next decade, we will buy and sell homes like we buy and sell stuff on Amazon.com. Sellers will go to an app, list their home, schedule a virtual tour, and sell their home to a company like Opendoor in as few as three days. Buyers will go to that same app, browse homes, schedule virtual tours/in-person tours, buy a home from a company like Opendoor, and move in within days.

This process is cheaper (it cuts out agents, and in so doing, reduces all-in costs from over 10%, to around 5%). It’s faster (by cutting out all the middle-men, ibuying allows consumers to buy and sell in days). And it’s more convenient (you can on-demand schedule virtual and in-person tours, sell whenever you want, and buy whenever you want).

It’s just better, in every way, to traditional home shopping — much like e-commerce is just better, in every day, to shopping at a mall.

Opendoor is the king of this ibuying market. Domestically, the company commands over 50% ibuying market share. That’s important, because these ibuying platform are marketplaces that run on network effects which benefit the biggest player in the space. In essence, Opendoor operates in more markets and has more home-sellers than any other ibuying platform, which means that it will continue to attract more home-buyers who are seeking the most inventory, which will in-turn attract more home-sellers are looking to expose their homes to the most buyers.

This network effect ensures that Opendoor will, for the near future, remain the unrivaled dominant force in an ibuyer market that will inevitably reshape the home shopping landscape in America.

Momentum Building

Nothing about this bull thesis has changed over the past few weeks.

If anything, the OPEN stock bull thesis has actually only strengthened. The company recently reported fourth-quarter numbers which smashed the company’s previous forecasts on number of homes sold, revenues and profit margins. Management also delivered a super-strong guide in which first-quarter revenues are expected to come in more than 30% above consensus estimates, mostly because Opendoor is finally ramping back up its home buying efforts (after pausing them during the Covid-19 pandemic). Opendoor also plans to launch in six new markets in Q1.

So, if anything, Opendoor’s business momentum is actually only improving, not deteriorating.

Against that backdrop, we think the recent drop in OPEN stock brought on by ephemeral rising yields fears is overdone, and little more than a generational buying opportunity for long-term investors.

Opendoor Stock Has Big Upside Potential

I cannot tell you exactly when the sell-off in Opendoor stock will end. But, what I can tell you is that — even after factoring in higher rates — Opendoor’s stock is significantly undervalued relative to the company’s long-term earnings growth potential.

Opendoor was founded in 2014. About six years later, Opendoor already commands 3.2% home-selling market share in the first six markets in which the company launched. Over the next 10 to 15 years, Opendoor will expand over 100 markets across the U.S. Amid that expansion, we think it is quite likely that the company grows its share of the U.S. home-selling market to 10%.

In a U.S. market where 6 million homes are sold every year, that equals 600,000 homes sold for Opendoor in 2035.

At a $350,000 average sales price, that equates to about $210 billion in revenue. Long-term EBITDA margins are expected to scale about 5%, producing 2035 EBITDA of roughly $10.5 billion.

Plugging those assumptions into our valuation model, we output a fair value on OPEN stock of $40 today. Long-term, by 2035, we see OPEN stock rising more than 500% to $140, based on a 20X exit multiple on our 2035 projected earnings per share of $7.

Both of those numbers are way above where Opendoor stock trades today.

To be clear, OPEN stock may not rebound back to those levels right away. But the fundamentals eventually and inevitably always win out. Thus, whenever this stock market bloodbath does end, I do think Opendoor stock will surge higher.

Bottom Line on OPEN Stock

The tech sector meltdown has created multiple great buying opportunities for long-term investors. OPEN stock is arguably the best stocks to buy amid this meltdown, given the company’s enormous long-term potential in real estate digitization and the stock price’s huge discount to that enormous potential.

Things may get worse before they get better. But they will get better, soon, and when they do, they will get a lot better.

— Luke Lango

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Source: Investor Place