Why Opendoor going public is a rising tide that could lift Zillow

For the second consecutive month, Deutsche Bank’s research team raised its target stock price for Zillow. This time, it was fueled by its biggest iBuyer competitor going public.

Deutsche Bank continues to be bullish on Zillow Offers, raising the real estate tech company’s target share price to $115 per share. But this time, it isn’t the Premier Agent business guiding the upwards trajectory. Rather, it’s the announcement that Opendoor, the top competitor to Zillow’s iBuyer offering, is going public.

Chamath Palihapitiya | Photo credit: tasti-sc (CC BY-SA 4.0).

Earlier this week, Opendoor announced it would be going public on the heels of a merger with Social Capital Hedosophia Holdings Corp II (Social Capital II). By legitimizing the iBuying model, which remains unfamiliar to many Americans, the Opendoor IPO may draw further consumer awareness to iBuyers overall, including Zillow Offers, Deutsche Bank believes.

In other words, a rising tide lifts all boats.

“We see the acquisition of OpenDoor by Social Capital Hedosophia Holdings Corp II as providing a market-based valuation comp for Zillow’s Homes segment, where most investors, today, attribute little value [and] increasing the profile of and somewhat legitimizing the iBuying space more broadly, which could increase consumer awareness and ultimately the format for home sales,” the investor note from Deutsche Bank reads.

The note, compiled by Lloyd Walmsley, Kunal Madhukar and Chris Kuntarich, three members of the company’s research team, also notes that the involvement of Social Capital II CEO Chamath Palihapitiya — who is part owner of the Golden State Warriors and the chairman of VirginGalactic — will bring more attention to the iBuyer space.

In general, the deal will bring more public market scrutiny to the space, as well.

“Social Capital II is led by Chamath Palihapitiya, the CEO of Social Capital and tech industry thought leader, who has a large media presence — a frequent guest on CNBC, an active Twitter broadcaster with 395,000 followers, and a part-owner of the Golden State Warriors,” the note says. “Given his credibility as an operator and investor, we see potential for Palihapitiya to bring a new investor base to the space to the benefit of Zillow shares.”

The note values the Zillow Offers segment of Zillow’s business alone at $32 per share, looking at the valuation of Opendoor post-merger and the share price of Social Capital II, at the time of the note, which was $17.56 per share.

The note also believes that the leads generated from Zillow Offers are poorly understood and under-appreciated, as is the mortgage segment revenue that Zillow can generate from Zillow Offers.

“We increase our mortgage segment revenue estimates in 2021 and 2022 reflecting the view that this business can scale faster than we (and the Street) have previously modeled on the back of opening up the business to conforming loans,” the note says.

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