THE THESIS
OPEN is still a high-risk turnaround, but the numbers are moving in the right direction. Revenue has started growing again, inventory is turning faster, contribution margins are improving, and the balance sheet looks far healthier than it did a year ago. This probably isn't an options play, but a great enty-point into an under-valued stock with huge upside.
THE NUMBERS
Q1 revenue came in at $720M, ahead of expectations. Management guided Q2 revenue to roughly $900M and contribution margins to around 6%. If they hit those targets, contribution profit would increase from roughly $32M in Q1 to about $54M in Q2.
Inventory metrics have improved as well. Homes held longer than 120 days dropped from 51% of inventory to 10% in just two quarters. This indicates that pricing, purchasing, and resale execution have improved. Older inventory is where Opendoor used to get into trouble (Older homes in inventory are riskier because Opendoor continues paying financing, tax, insurance, and maintenance costs while waiting for a sale. They also increase exposure to housing market declines and mean the company overpaid, mispriced the home, is struggling to find a buyer, etc.), and that seems to be much less of an issue now.
The balance sheet is also in great shape. The company ended Q1 with nearly $1B in unrestricted cash and more than $7B of financing capacity. A year ago people were scared of liquidity risk, now we can focus on margins and profitability.
THE KAZ FACTOR
Kaz Nejatian joined Shopify when the stock was \~$15/share. It's now sitting around a hundred dollars higher than that. Obviously can't attribute all of that to his involvement, but he was clearly helping make good decisions for $SHOP.
His salary at OPEN is one whole dollar. He's ineligible for any bonuses. His compensation is completely tied to the stock: his awards vest in installments ONLY if the company's 60-day average closing stock price hits specific price gates, from $6.24 up to $33. Kaz is definitely smarter (and richer) than me, and he obviously thinks the stock is undervalued.
MY TAKE
I care less about EPS and more about whether the trends from the last two quarters continue. If contribution margins stay above 5%, inventory remains healthy, and guidance holds up, the current valuation looks incredibly cheap. If margins start slipping or management backs away from its profitability targets, we're fucked, but that doesn't feel like the direction this will take.
POSITIONS
In for 2000 shares and 100 6/5 $5 calls.