Featured

Opendoor Technologies, Inc. (NASDAQ:OPEN) Morgan Stanley Technology, Media, and Telecom Conference March 8, 2022 6:00 PM ET

Company Participants

Eric Wu - Co-Founder, CEO & Chairman

Conference Call Participants

Unidentified Analyst

All right. Good afternoon, everyone. It's been a productive first couple of days. The TMT conference where we're really thrilled to have our conversation with Opendoor, with Eric Wu, the CEO and Co-Founder of Opendoor. Let me start with the important disclosures. Please note that all important disclosures, including personal holdings disclosures and Morgan Stanley disclosures appear at the Morgan Stanley public website at www.morganstanley.com/researchdisclosures.

Some of the statements made today by Opendoor may be considered forward-looking. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Any forward-looking statements made today by the company are based on assumptions as of today, and Opendoor undertakes no obligation to update them. Please refer to Opendoor's Form 10-K for a discussion of the risk factors that may affect actual results.

So Eric, it's great to sit down and talk to you about the overall -- the business, the business model, your view on the real estate space, et cetera. So thanks for being here live in person.

Eric Wu

It's good to see you. I wore a suit just for this occasion. You made a nice comments earlier today. I have worn a suit in 2 years, and so I hope this is entertaining for you all.

Question-and-Answer Session

Q - Unidentified Analyst

Yes, this is maybe my first of them where I do not have a tie and the person -- other person does. That was my goal, first. So maybe let's sort of start about with the residential real estate space broadly. We look at the size of this addressable market, the amount of dollars spent and just how early it is in the overall penetration curve to move from offline to online. There's a lot of debate in the space about what's the model that's going to bring that online. Is it going to be an iBuying model? Is it going to be an advertising model? Is it going to be other model? Tell us about why you think that your model specifically is going to sort of be the key catalyst to inflect that in the next few years?

Eric Wu

Yes. It's good question. I'm curious to your thoughts on what is the other model that can make this possible. But when I take a step back and look at how transformational companies are formed and how to become mainstream, it's really 3 key factors in my mind. One is that they have really strong product market fit; two, is that they understand distribution, how to reach large amounts of consumers; and then, three, they have really strong business model fit. And we have all 3. We actually have the elements to be really mainstream and move up the adoption curve, and so on and so forth.

And so I may not seem as old, but I'm actually quite aged and been around the valley for a long time. I've seen a lot of different things and a very rarely senior experience product market fit as strong as what Opendoor has. And we're solving a really big problem for consumers. The alternatives are absolutely broken from listing for 100 days and with uncertainty and hassle, repairs, negotiations and agents and MLS. And we've built a product that is truly delightful and magical. We convert 35% of real sellers. We have an NPS of 85. And it's really pulling us forward product market fit. So feel very confident in that factor.

The second factor is distribution, and this was a little more counterintuitive. One of the things that Keith Rabois kind of pressed me on early on in the day, in when we started the company was like come up with something that's 50 -- that you can say in 30 seconds or less and that's the way to cut through the clutter. And that's really critical to building mainstream consumer products. It can't be complex to understand. And we use this rule, which is like 140 characters or 30 seconds or less. And as it turns out, selling your home online in a few clicks works. It's interesting. It cuts through the clutter and it's unique. And so that affords aggressive spend in paid marketing, that gives us opportunities to partner with companies as well because it's a unique feature that attracts real customers down the funnel.

When sellers or homeowners hear that, you get a huge population of sellers raising the hand saying, I'm interested. That's why, obviously, we have competitors in the space and we partner with homebuilders and we have a big partnership with Realtor.com. It really does attract high-intent sellers. So that's down the distribution front.

And then the third factor, which is business model fit, I kind of view this as basic equation which is are you able to deliver more value than you're extracting from the system. And lots of companies kind of face challenges in this vector, right? Like, you see some of the ridesharing companies, if they raise the fees too high, then demand goes down, so on and so forth, right? And what we've experienced historically is that we can actually charge more than the traditional process and still have really high conversion and really high NPS. Because we're delivering down a different vector, which is convenience and certainty, which a realtor cannot deliver on.

And so as we get the cost down and we invest in better pricing systems, a lower-cost platform, so on and so forth, the services to lower the cost, we see adoption really increase. So we started the company actually charging 15% for the service or we start something like low teens in conversion. And as we've actually gotten the cost down, our conversion is back, it's increased quite a bit.

Unidentified Analyst

Yes. Got it. Okay. Yes, those 3 vectors are -- it's a good way to sort of think about the model. It's -- you've talked a lot about a transactional focus and almost starting to -- trying to make the platform like e-commerce for homes. Where do you still see more opportunities to improve that and even further remove friction to drive that conversion higher?

Eric Wu

Yes. I mean when we started the company, our vision was to make it possible to buy and sell a home at the tap of a button. And it's -- we thought about it is, can you make the housing market as liquid as a stock market? Or how can you make buying and selling home as simple as ordering something of Amazon, or hailing a write-off of Lyft and Uber or ordering food of DoorDash. And so that still remains a vision for the company. We started on the supply side for a very basic reason that probably seems obvious. When I say it that -- when you're working in non-commodity asset classes, if you win supply, you can use supply to aggregate demand. It's probably the same way that Airbnb thinks about their marketplace, right? So if you get unique supply, if you get great host on the platform, they attract travelers and guests or however they frame it at that company.

We have the same view, which is if we can build an engine to acquire unique supply then you can aggregate demand and build new experience on top of that. So it was one of the first 7 years of the company, iterating, experimenting, innovating on how can we attract sellers to come to the site and build a product that converts them. Again, this notion of selling home online in a few clicks. We worked really hard to lower the cost of that to improve pricing. We had to do capital markets, operations, and this is all compounded over 7 years, which has been a big moat for us. And that's been the better mousetrap, if you want to call it that, to get supply in the platform. So we feel very good about that. We're scaling that. And we've done so with durable sustainable unit economics and a playbook that actually can reach hopefully all cities in the U.S.

The next topic for the company will be, what I just mentioned, is completing the flywheel, which is using the supply to aggregate demand and building the e-commerce experience on top of that. So we made it 1 tap, 1 click selling home online. We want to make that same experience as possible to buy one of our homes, starting with our inventory. So we use to build the shop, visit, make an offer, get prequalified, personalize the house, all with just the Opendoor app. And we can use that motion that user experience in those rails to help you buy any home over time, right? So we can personalize your new home, if it's an MLS home, we can give you the same dashboards and all that experience and we view that as kind of the managed marketplace of the future.

Unidentified Analyst

And as you think about that and expanding to more cities and more types of homes, more sellers, more buyers, what are the main strategies you're going to use to really get more sellers aware of the product and get them to adopt it? And then a similar question for buyers, how do you add the next 3 million, 5 million, 10 million buyers to the platform?

Eric Wu

Yes. I mean, it goes back to the flywheel I just spoke of, right, which is like we're very comfortable with what we built on the supply side, which is the product positioning works, it stands alone in the marketplace. It's really quite unique. And we have partners that will help distribute the value proposition in the future around the web. And so we feel good about the acquisition of homes and sellers.

And the thing that's, again, counterintuitive is that we're able to use that supply to then aggregate demand for free. And so give me some stats. Counterintuitively, a lot of customers find out about Opendoor via signage. People still drive the neighborhoods. And they'll visit a house down the street, they'll see the Opendoor sign, it's self-tour. Go down the app to visit the house themselves. We get anywhere from 5 to 10 registered buyers per home that we list. On top of that, we obviously syndicate to MLS, which then goes to Redfin, Zillow and Realtor, which drives more audience and awareness. But the critical thing is that we have supply, and we're able to register 5 to 10 buyers at 0 marketing cost organically. So as we grow supply, we'll see the demand side follow.

Unidentified Analyst

Got it. Got it. Okay. I want to talk about a couple of bear cases and investor discussions we have, just in general about why this model may or may not scale as well as hoped long term. So the first one is that, as I know you are aware, one of your competitors recently exited the space. So one of the things that Wallstreet sometimes talked about as well. If it doesn't -- if it didn't work for that company that starts with a Z, why is it going to work for this company to start with an O. How do you think about the difference in your model versus any of the competitors? And how do you continue to drive the differentiation for sellers and buyers?

Eric Wu

Is anyone here from Zillow, just double checking. No, it's -- they're like frenemies. One, I think there's some overfitting here, as you mentioned. It's like if one company can't do it, then no company can like Facebook wouldn't exists if that was the logic. And so what I can say is that you rarely see media companies, high-margin media companies compete successfully against vertically integrated businesses. And there's class examples like Amazon versus eBay and then subsequently Google or DoorDash versus Oath and the list goes on and on.

And then the question is why, right? And for us, it's really been about a deep focus on the intersection of technology and operations. And again, like I mentioned, there's a couple of great examples. The companies that do this really well, build transformational companies like Amazon, Tesla, Apple. They can build hardware and software. That's really hard to do at the same time. And so we spent 7 years focused on that intersection of operations and technology. We have expertise in pricing, both off-line data collection and piping that into our models. We've built the lowest cost platform. We're 18x more efficient at transacting than a realtor. And that's because we centralized, we've automated almost every step we possibly could and really invested heavily behind the scenes in that platform. And then we have economies of scale now.

We're able to purchase materials in bulk. We're able to use our scale to get better deals with labor, and that all just lowers the cost of the system. And so those have been deep advantages that have been developed over 7 years of lots of hard work and iteration. And then we do view transparently, the bigger opportunity is to compete against the traditional sale or the traditional transaction. And we think the same advantages are going to pay dividends. And so vis-a-vis a realtor or brokerage, for example, like I think they're very good at local and expertise and maybe some servicing. But when you compare that to what we're doing, which is combining that operational component with great product and great technology, we kind of view it as the same thing at Amazon versus a retailer.

Unidentified Analyst

Got it. One of the other discussions we have sometimes is just the complexity with homes that are less commoditized and less uniform. The iBuying can work in communities in Phoenix or in Dallas or in Fort Worth where there's a big group of homes that are the same. But when you get to homes that are less uniform, it's much more difficult. What's your reaction to that? And how do you think about the housing stock TAM you're going after?

Eric Wu

It's interesting you asked that because when we started the company, we were very confident we can operate in cities like Phoenix. Actually, Phoenix was our first market, and we chose that by design. And the housing stock is more homogenous, there's muted seasonality, there's not deep winters, where it's hard to operate. And so we decided to choose what we perceived as an easier city because the pricing, if you just run a -- basically near regression against MLS data, it's like the error is one of the lowest of the nation. What we've uncovered is that as there's more variance in the system, there's puts and takes. And so as the housing stock becomes more or less homogenous, the consumer actually know the true value either, right?

So as there's more variance, the value of certainty increases and maybe put it in a way that everyone here is an investor, I'm assuming. If I was saying I was going to invest in your company and I'm giving you absolute certainty around price. If the markets wildly vary, like if there's like highs and lows of it, you value certainty a lot more, right? And this is an individual's largest financial investment and we're using capital for something. And so as there's more variance, as there's more uncertainty, the value of certainty increases. And we found that it's actually slightly better for the consumer and for us to -- for the housing stock not to be exactly homogenous. And so that's given us the opportunity to expand to cities that we never thought were possible when we started the company. Obviously, we still love Phoenix, Dallas, Atlanta, Las Vegas, where lots of housing stock that's quite homogenous. But we've entered lots of different cities at this point.

Unidentified Analyst

Got it. Okay. That's helpful. That's a good perspective. One of the other common discussions is around just the macro housing market. Housing market has been somewhat white hot for the last, let's call it, 12 months. Talk to us about how you think about philosophically, investing for growth as the housing market slows in the next couple of years as well as keeping safeguards in place to minimize balance sheet risk and have the right checks and balances in place.

Eric Wu

Yes. It's -- I'm not -- something that falls straight off. And so I would say a couple of things about risk. Obviously, this is something we study very closely and something we're very good at. There's 4 key points I want to make. One is that our homes are liquid listed assets, which is very different than a homebuilder or a REIT. And we hold homes for about 100 days, of which 50 days of that is under resell contract. That means we have a buyer, a deposit and a contract in place, right? So 50 days of that is on a resale contract. The other half is what you might call a listing exposure, right?

And the second thing is that if you study the worst U.S. housing recession in history, which is the GFC or subprime crisis, the market moved much slower than people perceive. And so nationwide in the worst part of the recession, the prices moved a negative 2.8%. And obviously, our exposure is 50 days, but that's well within our margin of error vis-a-vis our contribution margin of 4% to 6%. And so if you run the business model through the worst recession in U.S. history, we would still have positive contribution margin.

The third piece of that -- that's assuming we don't know that there's a recession. So the third piece of that we've invested heavily in the data collection here. So we're tracking in real-time demand signals, both of our homes, visits, as well as market homes, clearance rates and what's happening in market, mortgage applications, all of the demand signals, then the form of pricing. So there's never a disconnect between what we view with supply side pricing and demand side. And so we're tracking the data very closely, and we're updating prices in real time.

And then the fourth is really the debt structure. We have $11 billion of borrowing capacity, committed nonrecourse. If there's a dislocation, this gives us a tremendous amount of dry powder to actually capitalize on a dislocation.

Unidentified Analyst

Okay. Good color. Talk about ancillary revenue opportunities a little bit. I think once every online real estate company in the space talks about all these ancillary revenues they're going to capitalize on, driving the margins higher, et cetera. So on the ancillary revenue front, where have you made the most progress? And which products have proven to be as more challenging to drive attach on?

Eric Wu

Yes, it's a good point. I see a lot of decks and so a lot of them talk about the services opportunity attach, they're also talking about innovation and all the technology and data science. So it's interesting to reflect on that. I would say that we do view the vertical integration as a key component to delivering a best-in-class consumer experience. And we view the home as the platform, right?

So our first example that we've been quite successful is often lost over transparently as title and escrow. So we have 80% attached, very high NPS, incredible margins. We've, behind the scenes, built one of the largest title agencies in the U.S. I think investors will be shocked to see that over time. And so we feel very comfortable executing this motion of best-in-class experience through vertical integration and bundling to deliver one tap kind of transaction, and we know that works.

The next big bet for us is really on the demand side. So can we use our homes, as I mentioned, to aggregate demand and build an e-commerce experience on top of the homes, enables you to buy one of our homes with just our app, get prequalified as payments effectively, right? Personalize the home, which is upgrades. And you see this in the auto category and even in travel insurance on some of these sites and then close. And I think that is the experience that consumers want first and foremost, which will then result in high attach of all the things we can add in that part.

Unidentified Analyst

And when you think about the near term and long-term contribution margins, can you just walk us through a little bit how you think about contribution margins of the core and then the potential benefit of the ancillaries to the long-term contribution margin?

Eric Wu

Yes. I mean, what we've disclosed is that we're going to be running the business at 4% to 6% for the first-party core business. This is the buying and selling of real estate. And what we want to get to long term is margins of 7% to 9% if you add in services, which vis-a-vis like a broker referral fees, 10x that, right? So the margins are pretty healthy here and they're only going to expand.

We talked about title and escrow, which has been additive to the company, and again, a great consumer experience. We think buy with Opendoor, home personalization, home loans will add quite a bit. And there's 2 opportunities that are long range, but I think we're uniquely positioned to execute against, which is home warranty and home insurance. We have sophistication and data collection about the home and the condition. We're actually operating locally. So it makes our cost of servicing the home very low, and we've already acquired the customer. And so we may do that through partnership or we may do it ourselves, but something that we think we can be uniquely positioned to do and actually gives us LTV in the system as well.

Unidentified Analyst

Okay. You're now in, I think, over 44 markets. I think it's almost doubled year-on-year. Can you give us some examples of learnings of any of your older markets where you've said this really is advantage to scale. This takes longer to scale that you now are sort of applying to some of the newer markets to maybe grow and take share faster.

Eric Wu

I wish I had something insightful to say about this. But as it turns out, a lot of the cities operate about the same. And so the consumer behavior is not vastly different. Even in the fastest markets, you would assume that a seller can easily sell in the market, they prefer just to like list with a realtor. But again, we're competing down a different dimension, which is like you don't have a list at all.

And so there's like 3 major components of this, which is, or maybe 4, right, is consumer -- do consumers want the product, can we price the asset, can we operate with -- at a cost structure that enables us to deliver on the 4% to 6% contribution margin, can we build awareness of the product, right? And what we're seeing is that, again, we're in 44 cities, all those components outside of pricing are mostly manageable. And the reason why pricing has a bit more nuanced is that some MLSes don't have all the data fields and so on and so forth. We have to do some off-line collection. We want to process homes and kind of ramp and learn. So we can't just go, do $1 billion in the market after 1 week. We want that pricing engine to mature a bit based on real data.

Unidentified Analyst

Actually -- the consistency is actually, it's a good thing. Anything on the ad intensity side, do you sort of learned how you can grow faster or slower or push it more or less in any other markets? Or has the ad intensity been pretty consistent as well?

Eric Wu

Yes. Again, it goes back to like the product positioning and the consumer demand is about the same in every market as it turns out. And so it hasn't been a ton of variance between cities.

Unidentified Analyst

Okay. I'm going to open up for audience Q&A. If there's a mic runner, there's a one in the back. Maybe while the mic is running, let me ask one about agents. If we sort of fast forward 5, 10, 15 years, you pick your time machine, pick where you want to go on the DeLorean, how do you think about the role of the real estate agent in the long-term picture of the online real estate space?

Eric Wu

I mean it certainly feels like it has to evolve. And I think people is in that for 50 years, right? We like point to travel agents or used car dealerships or whatever, it doesn't feel like it's optimal and definitely feels broken to the consumer. I would state that my belief is that and we're building towards is that something like 35-plus percent given what we see today in our conversion metrics of customers looking to buy and sell a home will do themselves with just their mobile device, right? Something north of that, like our conversion suggests north of that.

And so then the question is, what is the role of the agent evolve to if a huge portion of people are self-served, right, with just technology. I think there's one component that's underestimated, which is that the agents serve as -- they give you advice on life planning and they're kind of like your financial adviser, not all of them for some of them are sales folks, some of them are like more logistics and project management based. I think that all goes away. Access to MLS, opening up doors, logistics, contracts, that all goes away. And the thing that's left actually is the -- like the therapist or like the expert on which neighborhood to choose or which school district is best for you or how long to live in a home. And so there is value there that I don't believe that software and data science can replicate in the short term. I do believe that's possible in the long term, 25 years out. But there's something unique about like people still use financial advisers. People still use travel agents at times. And so there's something comforting about a human telling you what to do.

Unidentified Analyst

Right. And it's a big transaction.

Eric Wu

Question in the back.

Unidentified Analyst

Thank you. Could you speak a little bit about the cadence of additions to inventory, I guess, 3Q, you had a pretty big purchases and then it slowed down a little bit in 4Q. And then how you see that evolving as you hit new markets like San Francisco in this year?

Eric Wu

Yes. I think unlike -- again, we run a company that has bits and atoms. So unlike pure software companies were like you could just flow more customers through and spin up an AWS instance, we have to manage the complexity of the business through the system. And that is a -- it's a bug and a feature. It's really hard to replicate, but it's also requires a ton of precision to execute against. And so we saw massive surplus of demand in Q3 last year for the product. We still see it, honestly. More customers coming to the site every single quarter we operate, which is a great sign that we don't have any constraints when it comes to top of funnel demand for the product for sellers.

There was a tightening of labor in Q3, Q4 last year, which gave us some pause on acquiring more inventory. And then subsequently, we said, okay, we need to actually sell of that inventory to manage operational constraints of labor. Now that's been worked through now. So we feel very good about the cadence moving forward of acquisitions and resales on an ongoing basis. And the great thing about it is, it would be a worse situation if we didn't have enough demand for the product. It's just about letting that demand come into the funnel and converting it now.

Unidentified Analyst

Okay. Got it.

Unidentified Analyst

Question over there.

Unidentified Analyst

Quick question. You guys have proven out the unit economics of your model. But I guess, over time, what percentage of transactions that you facilitate do you feel like you need to take title of because I would think you could connect buyers and sellers and earn some fees with that actually taking title on every transaction.

Eric Wu

I think it looks like Amazon long term and it's a really picky way to say, which is like there are 3 key managed marketplaces is actually quite large. I think what we're doing on the 1P side, which is first party for folks, is that this gives us complete control of the experience. And we do have marketplace products today and that comes in the form of institutional buyers. But we think that those rails actually apply to retail buyers as well, hence the big investment on the demand side. Because if you have an experience where you can get a quote online and you can sell or list at the tap of a button. We do have a natural way to connect it to our set of buyers coming to the app and visiting houses. And so -- but it has to be, in my view, a managed marketplace. It can't look like MLS and Realtors.

Unidentified Analyst

Chris?

Unidentified Analyst

Thanks. Eric, the -- relative to a lot of stocks in the market, the stocks underperformed a lot despite really positive revisions to revenue. You guys have been beating your numbers on revenue and gross margins. And what I hear most often a skepticism about the model itself. And I wanted to just kind of throw 3 fair cases that you in here, to get your response. The first is that -- and probably mentioned this a little bit, home price appreciation is the reason or kind of the necessary condition for you to have the types of gross margins that you did and that is home price appreciation plateaued in the back half. We saw that with lower contribution margin in the fourth quarter. That's one.

The second is that the business -- it's a good business at small scale, but it just can't scale to the volumes that you guys have talked about over time. So Zillow started to grow big and they kind of got out of control and they're like, yes, let's get out of this. The other guys that are doing, iBuying are doing it at much smaller size. So the question is, can you guys do -- can you scale the 50,000 homes or 75,000 homes or 100,000? Is that possible?

And the third is that the adjusted gross profit that you report and adjusted EBITDA that you report isn't a really good representation of the economic value that you're creating and that, in particular, there's financing costs, you have cost of debt and mezzanine financing. And so whatever adjusted gross margin you're showing us or contribution margin, that's not really durable economic value. And I guess the question there is, do you have the ability to finance it and kind of generate working capital to create sustainable economics? Those are 3.

Eric Wu

Yes, those are good questions. Maybe I'll have you repeat the other 2 in a second, but I'll answer them from third to first. We're also very happily able to disclose the mezzanine costs, which is, you call it plus or minus 1%. So like if you're saying, okay, well, tell me the true kind of like contribution profit back to the corporation, like you can calculate mezz costs, not like a complicated equation. And so if you're saying 4% to 6% is our medium term target, actually, we're operating above that. Obviously, on a full year basis in 2021, we'll be at 7% to 9% in the long term. That's like that's -- mezz cost is a consideration, but de minimis compared to the 7% to 9% opportunity ahead for us.

The operational scale, it points at like one thing which is are there diseconomies of scale in the business, right? Said it different way, which is like, okay, you can do it at $20 billion of revenue, can you do at $100 billion, right? And what I would tell you is that, that was the same concern people said when we're doing at $2 billion. And the same concern people had when we're doing $5 billion. And the same concern we're having at $20 billion, which there's puts and takes. And if you build the right systems and the right technology that where there's automation, then you can do at an infinite scale, right? And so there are components that are offline in the same way that Amazon has offline components, Apple has offline components, Tesla has offline components, DoorDash, Lyft, Airbnb, but those are manageable. Because the critical thing is that you're delivering customer value to both sides of the market. What was the first part of your question?

Unidentified Analyst

Home price. Home prices.

Unidentified Analyst

The first part is home price appreciation [Technical Difficulty].

Eric Wu

Yes, yes, what I would say is that the whole pricing function is to price the home with as much precision as possible given the risk in the system. And so we've already demonstrated that we can operate in a flat market. The company didn't benefit from 7% quarter-on-quarter appreciation when we started the company. And so I would say that -- I would point at the results over the past 7 years in a less hot market.

The other bear case literally 2 years ago was that we can operate in a hot market. And so now that we've demonstrated that we can actually make more margin in a hot market, there's more demand for the product, then there are many bear cases, can you operate in a declining HPA market? We have empirical evidence that, obviously, not all zip codes, not all cities, not all states have all gone up at the same velocity. So we have good evidence that we can operate in declining market. And outside of like inducing a recession, I can't give you more confidence outside of that. What I can say is that, again, if you apply the business to the subprime crisis and do the analysis, the business actually is quite healthy. And then the bull case is that demand flock to the site.

Unidentified Analyst

Great. All right. Eric, we hit the clock. This is great. Thank you for taking time.

Eric Wu

Thank you.

Unidentified Analyst

Thank you, everybody.

Eric Wu

Thank you.

Comments are closed.