A little more than a year ago, I discussed whether Opendoor Technologies (NASDAQ:OPEN) and OPEN stock was a better buy than Zillow (NASDAQ:Z, NASDAQ:ZG). I concluded that, until Opendoor got its business back to pre-Covid numbers, Zillow was the safer bet.
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As we know in hindsight, the entire home-buying business by companies like Zillow and Opendoor has been a spectacular bust over the past year. As a result, OPEN stock is down 66%. Z stock is off 68% as well.
You couldn’t script that any better.
So, just over a year since my previous piece on the two businesses, I will compare them once more. Both are down and out, but one of these stocks is surely the better buy.
Is OPEN Stock the Better Option?
Let’s start with OPEN stock. Currently, Opendoor’s total return year-to-date (YTD) is a drop of 24%. That’s considerably worse than Z stock, which is now up nearly 1% YTD.
However, analysts seem to be okay about OPEN stock despite this decline. Of the 10 analysts covering it, five rate Opendoor as a buy, four rate it as a hold and one rates it as underweight. The 12-month median price target is $21.50, roughly double where the stock currently trades at. Meanwhile, the 23 analysts covering Z stock give it a 12-month median target price of $74, an upside of just 16%.
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That’s a real positive.
Still, there’s more to the picture. In January, for instance, Barron’s discussed the whole iBuying model and why analysts don’t like it, quoting Bank of America (BofA) analyst Curtis Nagle. Nagle had just initiated coverage of OPEN stock with an “underperform” rating and an $8 target price. Of the 10 analysts covering the stock, Nagle’s target is the lowest. Nagle called the iBuying of homes an “inherently risky and largely untested business model that carries low to negative margins and requires high debt to finance transactions.”
According to the analyst, by the end of 2021, Opendoor was buying three houses for every home that it sold, creating an inventory glut when home prices appear to be falling.
In 2022, Nagle estimates that Opendoor will lose 81 cents per share on $12.19 billion in revenue. Based on 617.8 million shares outstanding, BofA expects the company to lose roughly 4 cents for every dollar of revenue.
Nagle doesn’t see the home-flipping business adding much meat to the bone despite the company growing revenues in the third quarter of 2021. The company grew sales to $2.3 billion, 91% over its revenues in Q2.
In Q3, its contribution profit after interest was 7.0%. That was up 220 basis points from Q3 2020. However, the company’s operating expenses during the quarter rose 236% to $270.9 million or roughly 1.3 times its gross profit.
As I said a year ago, a lot had to go right for OPEN stock to deliver for investors. The same applies over this next year. No doubt, it’s going to be incredibly tough.
Zillow Looks Like the Superior Pick
There are two ways to look at Zillow abandoning its iBuying business.
Back in November, while discussing Upstart (NASDAQ:UPST), I waded into the whole iBuying fiasco, suggesting that Zillow’s algorithm wasn’t working. As a result, it was overpaying for a lot of homes. With that said, I believe CEO Rich Barton made a wise decision to put Zillow Offers out to pasture before it took the entire company down.
What’s to say that Opendoor won’t have to make the same decision in the future? Only, with its business model, the company would have to liquidate inventory and return any leftover capital to investors after paying down its debt.
Unless the housing market falls to pieces, I don’t think that will happen.
That said, the other side of the argument with Zillow’s iBuying closure is that it has ceded the market to Opendoor without getting anything in return. Should Opendoor figure out a path to profitability, OPEN stock investors would be immensely grateful to Barton.
InvestorPlace’s Luke Lango recently discussed this subject shortly after the company’s shocking announcement in November. Lango suggested that Opendoor was the “next” Amazon (NASDAQ:AMZN). He went on to say that Opendoor’s technology was superior. As a result, Opendoor had been paying less for the homes it bought relative to Zillow.
However, Lango’s Phoenix housing market example through the first nine months of 2021 shows that Opendoor paid more for houses than the average market price from April through September. Zillow paid more than the average market price from mid-June through September. From January through mid-June, it paid less.
Offerpad Solutions (NYSE:OPAD) was the clear winner in Lango’s example, however. Through all nine months, it paid less than the average market price. In addition, when it announced its Q3 2021 results in November, its outlook called for positive earnings before interest, taxes, depreciation and amortization (EBITDA) for fiscal 2021.
The Bottom Line on Opendoor
If iBuying is your jam, Offerpad could be a better buy than Opendoor. But that’s a subject for another day.
Until these iBuying businesses can deliver consistent profits, Zillow remains the better buy. That’s because its legacy real estate ad business was always the real deal. Zillow Offers was always going to be just the icing on the cake.
While that didn’t work out, there’s nothing wrong with its existing business. In fact, the company recently reported Q4 revenues and earnings well ahead of analyst expectations. Barton had the following to say:
“In 2021, we estimate that nearly one-quarter of all buyers in the U.S. reached out to connect with Zillow during their shopping process, yet we only generated revenue on an estimated 3% of total customer transactions.”
For me, there’s no question that between Z stock and OPEN stock, the former is the better pick.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
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