With many special purpose acquisition company (SPAC) opportunities out there, why go with Social Capital Hedosophia (NYSE:IPOB)? It’s simple. Once IPOB stock acquires real estate disruptor Opendoor Labs, you can expect shares to take off.
How so? Well, Opendoor is an iBuyer. Using algorithms to make instant offers for homes, iBuyers address many common points of pain among home sellers. Simply put, this business model has big potential to disrupt the old-school residential real estate business.
As the buying and selling of homes moves online, iBuyers like Opendoor stand to win. The company has already scaled into a multi-billion-dollar business. And it’s still getting warmed up. Given the fact that it’s yet to expand nationwide, the runway remains long for this unique combination real estate and tech play.
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Of course, Wall Street is already well aware of the tremendous growth opportunity with Opendoor. That’s why shares in the SPAC remain pricey, even after the recent pullback.
But does that mean you should avoid it? Not so fast. Don’t miss the forest for the trees and pass up on this just because of the valuation. With its strong prospects, now’s the time to get into this potential long-term winner.
IPOB Stock, Opendoor and The Future of Real Estate
So, how can iBuyers like Opendoor disrupt the traditional real estate business?
Firstly, they have an edge when it comes to listing fees. While fee structures in other industries have gone down thanks to technology, a 6% listing fee remains the norm in real estate. But, as I previously discussed, the company’s lower listing fee of 5% offers a tremendous value proposition.
Secondly, there’s the convenience factor. Instead of listing with a traditional realtor and waiting for a buyer to make a bid, Opendoor gives you an instant quote for your home.
Gallery: 7 Red-Hot Recent IPOs to Ditch Now (InvestorPlace)
Over the last few weeks, several initial public offerings have helped prove that the equity markets are back on track. Recent IPOs like Snowflake (NYSE:SNOW) and JFrog (NASDAQ:FROG) have seen enormous first-day pops from their opening price. Investors are looking for growth, and most recent IPOs have been younger, early stage companies. It is not just the IPO market, either. So-called special purpose acquisition companies (SPACs) have brought dozens of companies public, many in growth industries like electric vehicles and online gambling. But the big gains for newly public companies, whether IPOs or SPACs, raise the same questions. At what point does valuation trump even impressive growth? And can a single industry really birth so many expected winners? For these seven recent IPOs, those questions seem paramount. Most have seen solid gains since going public. But all have significant concerns that suggest significant risk going forward. The IPO market doesn’t necessarily need to cool down for these stocks to do the same: American Well (NYSE:AMWL) Shift4 Payments (NYSE:FOUR) Laird Superfood (NYSEMKT:LSF) Social Capital Hedosophia Holdings II (NYSE:IPOB) Casper Sleep (NYSE:CSPR) Vroom (NASDAQ:VRM) Xpeng (NYSE:XPEV)
Recent IPOs: American Well (AMWL)
The story behind American Well admittedly sounds attractive. The company is one of several telehealth plays garnering investor attention at the moment. The sector should see accelerated growth as the novel coronavirus pandemic draws interest from patients, doctors and insurance providers. But a closer look raises some concerns. Telehealth is going to be a growing industry, but American Well hardly has that industry to itself. In fact, its odds of garnering top market share seem relatively slim. The merger of Teladoc Health (NYSE:TDOC) and Livongo Health (NASDAQ:LVGO) is likely to create the telehealth leader in the United States, and potentially internationally. Meanwhile, investors are paying up big for AMWL stock, even after a recent pullback. Shares have rallied over 80% from their IPO price of $18. AMWL trades at over 40x trailing 12-month revenue. The company is not profitable, and likely won’t be until 2023. Admittedly, that type of valuation isn’t out of line for this market. But those kind of multiples usually are applied to companies that not only are in fast-growing markets, but have a real chance to lead those markets. With the Teladoc tie-up, American Well is playing for second. AMWL stock isn’t priced as such.
Shift4 Payments (FOUR)
The payments space has seen no shortage of winners, and out of the gate Shift4 stock has been one of them. FOUR has rallied nearly 150% from its IPO price of $23. But there are reasons to believe that, at the least, FOUR stock is headed for some short-term pressure. Here, too, competition will be intense, as Shift4 goes up against giants like Square (NYSE:SQ), Stripe and PayPal (NASDAQ:PYPL). Shift4 aims to mitigate that pressure by focusing on key verticals — but those verticals include restaurants, hotels and retail, all of which are facing significant pressure from the pandemic. Valuation, meanwhile, looks stretched. FOUR trades at 100x next year’s earnings estimate. Price-revenue multiples appear less aggressive, but are explained by lower gross margins. And Shift4 reportedly was up for sale last year before pivoting to an IPO, which raises the question of why private shareholders were looking to cash out. Shift4 does have time to grow into its valuation, and a market capitalization under $5 billion doesn’t require the company to quickly become another giant in the space. But with the stock taking another leg up in recent weeks, it does seem like there’s a good chance the post-IPO rally is at or near an end.
Recent IPOs: Laird Superfood (LSF)
Laird Superfood gets its name from founder and well-known competitive surfer Laird Hamilton. The company develops plant-based foods, initially focusing on beverages, such as coffee creamer and coconut water. Last week, the company launched its first snack with flavored Pili nuts. With Beyond Meat (NASDAQ:BYND) opening eyes to the promise of plant-based foods, it is not a surprise that LSF stock has seen heavy buying after its IPO last month. Still, as with FOUR, there is a real question as to whether category strength alone can drive the stock higher. After all, LSF has more than doubled from its IPO price — in a little over three weeks. Its market capitalization now clears $400 million. Revenue over the past four quarters is less than $20 million. For now, this is a niche business in what remains, despite Beyond Meat’s growth, a niche category. Given that, a 20x-plus multiple sales looks full — if not outright stretched.
Social Capital Hedosophia Holdings II (IPOB)
Social Capital Hedosophia II is one of the SPACs that have provided an alternative route to market. And it has made one of the biggest deals of the year, merging with digital real estate platform Opendoor. IPOB CEO Chamath Palihapitiya has called the company his “next 10x idea.” Many investors seem to agree. IPOB stock has soared since the deal was announced. It trades above $24 at the moment, up more than 100% since the merger was announced just last month. But there are reasons for skepticism as well. Opendoor itself sees a path to $50 billion in revenue, along with EBITDA margins of 4%-6%. At the midpoint, that assumes the platform would generate about $2.5 billion in EBITDA once the revenue target is reached. But Opendoor, based on the current IPOB stock price, already is valued shy of $17 billion — nearly 7x that figure. Assuming it takes a decade to hit that $50 billion mark (which is 10x 2019 revenue), using margin guidance investors could be looking at low double-digit annualized returns — if Opendoor delivers. Certainly, that is an outstanding investment in the best-case scenario, but there are risks as well. Zillow (NASDAQ:Z, NASDAQ:ZG) is moving aggressively into the same market. So are a significant number of startups. Those competitors will not only fight for revenue, but could squeeze margins as well. Realtors will fight to protect their turf too — perhaps by lowering commissions. More broadly, there is the real risk that the Opendoor model just doesn’t work. Arguing that U.S. home sales are “ripe for disruption” sounds innovative. But the vagaries of local markets, let alone individual properties, simply may not be captured by even the most powerful algorithm. At this point, at least some of the potential “10x” upside seems priced in. The risks, however, are not.
Recent IPOs: Casper Sleep (CSPR)
The story for Casper Sleep is not over. But it is certainly not off to a good start. CSPR is one of the few recent IPOs to trade down. The stock is off about one-third from its initial price of $12 — which itself was cut sharply from an initial range of $17-$19. The core problem for Casper is simple: It is not growing fast enough. The novel coronavirus pandemic has benefited e-commerce players of all kinds. But the company delivered just 5% direct-to-consumer growth in its second quarter. Rival Purple Innovation (NASDAQ:PRPL) grew DTC revenue by 128% in the same quarter. Simply put, Casper is falling behind. And so it is little surprise that its stock has done the same. While CSPR has faded, PRPL stock has more than doubled since Casper’s IPO, gaining 244% so far this year. That needs to change. But catching up will take some time. In the meantime, there is an obvious question for Casper: If it can’t grow now, when exactly will it grow?
Vroom (VRM)
E-commerce has been one of 2020’s hottest sectors, and the optimism has extended to the automotive industry. Carvana (NYSE:CVNA) has more than doubled this year, and gained a whopping 860% from March lows. Shift (NASDAQ:SFT) just went public via a SPAC merger that closed this week. And VRM, even with a pullback, has rallied 123% from its IPO price of $22. The obvious question is whether all of these companies can be winners, even if the pandemic drives increased online penetration of an industry that long has run on face-to-face dealings. The likes of CarMax (NYSE:KMX) and AutoNation (NYSE:AN) will roll out their own online options. The market is huge in terms of sales, but there simply may not be that much profit to go around. Again, VRM has pulled back, which does make valuation more constructive. But even at a lower price, the market still is pricing in a significant amount of success in terms of both market growth and Vroom’s market share. There doesn’t seem to be much room for error, and the pullback in VRM (and sideways trading in CVNA) may be a reflection that the market is recognizing that fact.
Recent IPOs: Xpeng (XPEV)
Perhaps no sector has been hotter in 2020 than electric vehicles. And so investors are looking for the next big EV winner — and some believe it is Xpeng. Perhaps. Xpeng does have a big opportunity in China, which should be one of the faster-growing EV markets in the world. But the company for now focuses only on high-end SUVs, putting it in direct competition with Nio (NYSE:NIO) and other domestic manufacturers. Tesla (NASDAQ:TSLA), of course, is ramping up its own operations in the country. Xpeng is growing nicely — but so are the dozens of EV manufacturers in the country. Remember, China offers generous subsidies, and its pandemic recovery is boosting manufacturers. It is hard to see even that growth supporting what is a $17 billion market capitalization on the back of just $300 million in revenue. And if the sector as a whole pulls back at all, XPEV could have a long way to drop. On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article. After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.
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8/8 SLIDES
What does this all add up to? The potential for iBuyers — and Opendoor in particular — to grab a commanding share of the $1.6 trillion U.S. real estate market (Page 7). The company’s own conservative projections of 3% market share mean it could become an almost $50 billion per year business (Page 41).
With this in mind, it’s no surprise investors have given IPOB stock a premium valuation. Sure, compared to recent results, this valuation looks very frothy. But, relative to its potential, the growth premium is more than reasonable.
Premium Valuation? Yes — But Don’t Sweat It
Like with many megatrend stocks, you have to pay up for growth. That’s the case here with IPOB stock, even after the recent sell-off. Based on its current trading price (around $17 per share), the pro-forma valuation — with 630.7 million shares outstanding after the deal closes — is around $10.7 billion.
Granted, that’s pricey relative to the company’s 2019 sales numbers of $4.7 billion. Yet, while the pandemic may slightly impact 2020 sales, this hiccup pales in comparison to where revenue could be just a few years out.
$50 billion in annual sales may sound like a stretch. But, Opendoor has yet to expand into some of America’s most expensive housing markets, like in the northeastern United States. In short, the company is just getting started. Even if there’s a growth premium baked into the price, you are still getting in on the ground floor.
Keep in mind, there may be some volatility along the way. Shares could continue to head lower as we approach the close of the Opendoor deal. But, another move lower also gives you the opportunity to enter at an even more attractive entry point price.
While the valuation is rich, the tremendous possible growth here makes IPOB stock worth it.
Buy This SPAC Before The Deal Closes
Tech disruption of old-school industries is a trend that’s not stopping anytime soon. First, technological innovation upended retail, creating the massive e-commerce industry. Then, with the rise of online automotive retailers, tech disrupted the traditional auto dealer industry.
Now, iBuyers like Opendoor are changing the game for residential real estate sales. In turn, that means massive share-price upside for IPOB stock. Even as the stock continues to trade at a premium valuation, buying today will pay off big in the future.
And if the excitement around SPACs continues to cool down in the coming days, this stock could head lower in the near-term. That pullback would just be another reason to enter a long-term position.
Bottom line? Buy IPOB stock now, ahead of its promising Opendoor acquisition.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now.
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