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Hey everyone, both Opendoor and Offerpad released their earnings today, and I wanted to do a brief comparison about who among them is the better operator.
The main metrics that I think I should observe going forward are at the end of the above table, contribution profit after interest per unit and net income per unit.
I choose contribution profit after interest per unit as an indicator of maximum profit potential and net income per unit as an indicator of actual profit generated.
From both of these metrics, we can see that Offerpad is a better operator. Why? Simple Offerpad generates more profit potential(contribution margin per unit) and actual profits(net income per unit). Offerpad is also efficient in G&A expenses(nearly half of Opendoor). Offerpad's extreme execution focus has given them a significant advantage in nearly every aspect of their business. Also, Offerpad can generate significantly higher profits at one-fourth of the scale of Opendoor(3602 homes sold by Offerpad vs. 12669 of Opendoor). In a low margin business every percent and basis points matter, so OfferPAD > OPENdoor for now.
If we dig deeper, fundamentally, we see this happening primarily because Opendoor is more of a "Tech" company, whereas Offerpad is more of a "Tech-enabled company." You can see this from their tech expenses(7% Opendoor v/s 2% Offerpad) and Stock-Based-Compensation - SBC expenses(1.3% Opendoor v/s almost zero with Offerpad.).
But, this is a benefit for Opendoor as they scale to selling more houses per year, they will have tremendous economies of scale due to their automated software-driven approach v/s Offerpad's human-driven approach. Opendoor's endgame is gaining as much market share as they can and using that scale as a barrier for any other player to ever come close to them.
I feel they have executed at an incredible pace and are profitable and are 4 times the size of Offerpad. So, their moat is wide. And, it's actually getting wider, Opendoor has more gross profit to reinvest in sales & marketing, nearly double of Offerpad and that will enable them to build a powerful brand over time.
Next year is a tough environment for both of these. Who will win? Will both win? Who will have the highest returns over the next 10 years?
As you can see this is a fun mystery to ponder, learn from, own some part of and enjoy the ride with talented teams at Opendoor and Offerpad.
Check out some of my deep dives at https://www.moderngrowthinvesting.com/tag/deep-dives/ to learn a lot of qualitative and quantitative insights about high & hypergrowth innovative businesses.
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Thanks, take care.
Chet @ Modern Growth Investing