Property Technology, or PropTech, is an industry that centers around the digital transformation of the legacy property industry. This includes the use of software and technology tools to automate various processes and improve the customer (buyer/renter) or landlord (owner) experience. According to GrandView Research, the global PropTech market was valued at $25 billion in 2021 and is forecast to grow at a solid 15.4% compounded annual growth rate, reaching a value of $64 billion by 2028. Thus, let's take a look at two of my favorite PropTech stocks that are poised to benefit from the eventual rebound of the property market.
1. Zillow
Zillow (Z, Financial)(ZG, Financial) is the market-leading online real estate platform in the U.S. with over a 65% market share, according to data by Comscore. Despite this dominance, the company has faced major challenges since its iBuying business had a major catastrophe. Its AI models failed to forecast the dip in house prices, and many of its homes purchased for home flipping were underwater (meaning they had to be sold at a loss). This led to Zillow shuttering the segment in November 2021.
A positive is Zillow has a great founder and CEO Rich Barton, who was honest and upfront about the calamity. In an earnings call, he admitted “we swung for the fences and missed." Zillow is now at a transition stage as the company aims to still create a “housing super app” and double its share of customer property transactions from 3% to 6% by 2025 - just without the home flipping.
To accomplish this, Zillow aims to focus on its four main pillars; Touring, Financing, Seller Solutions and Enhanced Partner Network.
On the Touring side, Zillow acquired ShowingTime in 2021, which enables prospective renters to schedule viewings directly inside the application. This reduces the friction of the entire process and mitigates the need for phone calls, which are not really popular with the Gen Z customers. Progress has been solid so far, with roll outs in Atlanta, Houston, Dallas and Denver in 2022.
Zillow has also not completely given up on iBuying as it signed a deal with ex-competitor Opendoor (OPEN, Financial), which enables Opendoor sellers to get an offer directly via Zillow. I believe this is a positive strategic move that will allow the two companies to benefit from each other.
Challenging financials
Zillow has made positive progress after its iBuying failure, but the company is facing major challenges driven by the rising interest rate environment and a cyclical decline in the housing market. The company reported revenue of $435 million in its recent quarter, which declined by an eye-watering 19% year over year.
The major pain was felt in Zillow’s Mortgages segment, which reported a 65% year-over-year decline to just $18 million as prospective buyers halt purchases.
The silver lining for Zillow is the Federal Reserve's interest rate hikes look to be working and inflation has been on a downward trend from its high in June 2022.
Another positive is if people aren’t buying as many homes in the short term, they are likely renting. This dynamic showed up in the numbers with a 13% increase in rental revenue in the fourth quarter of 2022.
Moving on to profitability, Zillow reported a net loss of $72 million in the fourth quarter of 2022. This may seem bad, but it was actually an improvement over the loss of $261 million reported in the equivalent quarter of the prior year.
Zillow also has a solid balance sheet with $3.4 billion in cash and marketable securities versus total debt of $1.8 billion, the majority (~$1.7 billion) of which is long-term debt.
Valuation
Zillow trades at a price-sales ratio of 1.77, which is cheaper than its historic levels.
The GF Value chart indicates a fair value of $81 per share and thus the stock is “significantly undervalued” at the time of writing.
2. Opendoor
Opendoor (OPEN, Financial) is the U.S. leader in the iBuying of real estate, which is a technology-enhanced version of home flipping. As previously mentioned, Opendoor’s new partnership with Zillow provides many synergies and cements the company as the dominant leader in the U.S. iBuying market.
Opendoor is rapidly moving towards creating a “sell it now” style e-commerce solution that will enable homes to be sold to the company rapidly.
The first step involves getting a preliminary offer so the seller has an approximate idea of the price Opendoor is willing to pay for the property. Next, the Opendoor platform assists with recording a video walkthrough before an offer is finalized and the closing date set up. I believe this has the potential to become an extremely powerful solution as it can effectively increase the liquidity in the real estate market, which could increase the velocity of transactions and thus enable more opportunities to capture economic value.
Opendoor also plans to introduce a third-party marketplace as well, although it has been slow to ramp up this, much to the dismay of analysts.
Struggling financials
Opendoor reported mixed financial results for the fourth quarter of 2022. Its revenue was $2.857 billion, which declined by an eye-watering 25.25% year over year. This was driven by reduced sales due to the rising interest rate environment, which has impacted the mortgage market. To combat this, Opendoor has started to reduce its pace of new property acquisitions due to market uncertainty.
Its number of homes acquired declined by a substantial 64% in the fourth quarter to just 3,427. A positive is the company reported rapid revenue growth of 94% year over year for the full year of 2022, with $15.6 billion generated.
Moving on to margins, its overall contribution margin was -7.2%. Operating losses grew from $102 million to $192 million, which was not a great sign. A positive is the adjusted Ebitda loss was $351 million, which was in line with management's guidance.
Opendoor has a strong balance sheet with ~$1.3 billion in cash, cash equivalents and short-term investments and ~$670 million of equity invested in its homes compared to $5.4 billion in debt. The business also executed $12 billion in asset-backed facilities is in excess of current inventory levels. This is a positive sign given the uncertain real estate market.
Valuation
Opendoor trades at a price-sales ratio of 0.07, which is ~98% cheaper than its five-year average.
Final thoughts
Both Zillow and Opendoor are two tremendous PropTech companies that are both facing challenging times due to the macroeconomic environment. I believe interest rates will begin to be lowered soon as inflation continues to fall, which should make mortgage rates more affordable. This should help to boost the real estate market by brining homebuyers and investors back in. As an investment prospect, I like Zillow better as its business model is less risky after the iBuying exit.
