Linking strategy

Opendoor and Carvana feel free money hangover


With the price of used homes and cars now plummeting as rapidly as they skyrocketed, would-be digital disruptors like Opendoor Technologies Inc. and Carvana Co. have been humbled.

Investors had swung these platforms to become the “Amazon of homes” and “the Amazon of used cars” respectively due to a shared ambition to improve an often lousy sales experience, and to buy and to sell expensive items on a large scale.

But flipping homes and cars in a bubble was mounting trouble: Together, the two companies reported combined losses of $1.4 billion on Thursday as rising interest rates pushed customers out, leaving them sitting on rapidly depreciating stocks. Since the peak, their stocks have crashed more than 90% and their bonds are trading at distressed levels.

Although Opendoor’s losses have been greater, I believe it is in a better position to weather what CEO Eric Wu has called a “crucible moment,” thanks in part to a strategic pivot to a method of selling at less capital-intensive domicile. On the other hand, the weakness of the balance sheet of Carvana remains worrying.

These two companies were the main beneficiaries of the era of cheap money – low interest rates provided cheap capital to grow rapidly, while helping customers afford ever-increasing assets. more expensive – but they were too slow to recognize that a storm was brewing. Just like the hedge funds that backed them.

In February, Carvana announced a $2.2 billion buyout of ADESA Inc.’s US auction business, adding to its indebtedness at the wrong time. Investors backed down, forcing it to agree to pay more than 10% interest on $3.3 billion in new borrowing in April, a burden that jeopardizes its battle to break even.

Meanwhile, Opendoor bought more than 14,000 homes between April and June, paying the highest prices in the market. While it is now trying to offload those homes fairly quickly, the damage is done: On Thursday, it announced a $573 million write-down for anticipated losses. Worryingly, the majority of these high-priced homes still remain on its books.

At least Opendoor seems to have recognized that its core business model is too risky in such a volatile environment. While it continues to buy homes (albeit at a slower pace and at much more conservative prices), the company plans to further facilitate home sales, including to institutional buyers.

Instead of putting capital at risk, he will now also bring buyer and seller together on his platform and earn a commission. These third-party sales are inherently higher margin and he hopes they will account for more than 30% of transactions by the end of next year.

Adjusted earnings will likely deteriorate before they improve, but Opendoor’s strategic pivot at least gives investors reason for hope. Plus, he has a decent $1.3 billion buffer of unrestricted cash to tide him over. “Companies without conviction, perseverance and capital will not be able to weather the storm,” Wu warned.

Was he talking about Carvana? The used-car dealership claims to have moved from a “grow as fast as possible to profitable as fast as possible” approach, but that’s easier said than done. Like Opendoor, it cuts jobs and marketing costs, but after expanding too quickly, it has too much car refurbishing capacity.

Earnings per vehicle sold were impacted by rising interest rates (Carvana was heavily dependent in the past on the sale of loans), while cash fell to $316 million. While the company boasted $4.4 billion in total cash, nearly half is in real estate that it could monetize through sale and leaseback transactions.

On the investors’ call, management insisted this put them “in a good position to weather this storm”, but analysts questioned whether the company would need a dilutive capital raise. At this rate, it is possible.

Aiming to improve the experience of selling homes and cars was admirable, and these two companies had to deal with incredibly volatile conditions: first a pandemic, then the fastest rise in interest rates in decades. . But when historians come to write the history of the easy money era, the hubris of Amazon copycats will surely deserve a few words.

More from Bloomberg Opinion:

• Apollo digs Carvana out of a giant used car hole: Chris Bryant

• Fed slowdown not getting much help from Big Tech: Conor Sen

• Is Opendoor the Amazon of homes or just another Carvana? : Chris Bryant

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times.

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