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Opendoor, SPACs, The FTC, Facebook and Snowflake

Opendoor goes the SPAC route, the FTC mulls a Facebook antitrust suit and Snowflake arrives on the New York Stock Exchange.
(By Andy Dean Photography)
(By Andy Dean Photography)
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Good morning! Today’s word count is 1,972 words, or a 9-minute read. Let’s get to it:

“The Dow added less than 1% and oil prices rose after U.S. crude inventories unexpectedly declined and Hurricane Sally’s landing curtailed offshore production in the Gulf of Mexico,” WSJ writes.

  • S&P 500: $3,420.29
  • Nasdaq: $11,205.35
  • Bitcoin: $10,956.77
  • U.S. 10-Year: 0.676%

Also, be sure to enter the new, weekly giveaway in Morning Cents every day.

Justin Oh’s Quick Read: $IPOB

Please see an urgent update on $SNOW in the Snowflake section of this email!

About OpenDoor ($IPOB), at around $16 per share, the stock values OpenDoor at $8.5 billion, about 9.5x 2023 projected gross profit. Even though I think it will take a long time for this industry to take meaningful share, that doesn’t mean they can’t keep growing quite a bit in the meantime. Given Zillow ($Z) trades at 8.8x and Redfin ($RDFN) trades at 9.8x 2023 projected gross profit, it’s pretty “fairly valued” in comparison to its competitors. I do believe in the trend in the very long-term, though, and if you want exposure to home “iBuying,” I would own all three ($IPOB, $Z, $RDFN) to diversify yourself. But if I had to pick one right now, it would probably be Zillow ($Z).

Opendoor Agrees To Reverse Merger With Chamath Palihapitiya-led SPAC

Billionaire investor Chamath Palihapitiya’s SPAC, Social Capital Hedosophia II, announced its acquisition of online real estate marketplace Opendoor. The deal values the startup at $4.8 billion.

Why It Matters

Opendoor is disrupting the real estate market.

  • By using an algorithm, homeowners get a quote and can sell houses directly to the company.
  • Opendoor then makes fixes and puts it back up to sell, earning money on the spread between the home’s purchase and sale price. It also provides mortgage, home repair and home warranty services.
  • The company, which operates in 21 markets, says it sold more than 18,000 homes last year, and Palihapitiya called Opendoor his “next 10x idea.”

Palihapitiya’s move is a bet on greater homeownership in America and the digitization of commerce.

  • Sales of existing homes shot up 25 percent from June to July, the most substantial monthly gain going back more than half a century, according to the National Association of Realtors.
  • In 2018, McKinsey Global Institute estimated an additional $13 trillion could be added to global GDP by 2030 through digitization, automation and AI.
  • Like its business, the bulk of Opendoor’s negotiations took place over the internet.

The SPAC boom keeps on trucking.

  • This year has been record-setting for blank check companies, with 97 SPACs going public and generating gross proceeds north of $38 billion, according to SPACInsider.com.
  • Palihapitiya has prior experience with SPACs, having taken Virgin Galatic public through a separate vehicle.

Opendoor does have issues to quell.

  • The company’s net loss climbed from $240 million to $339 million last year. Opendoor cut 35 percent of its staff, roughly 600 people, earlier this spring.
  • The trajectory is similar to other high-profile firms such as WeWork, Uber, and Lyft, which showed a history of losses and got punished by public investors.
  • Perhaps its why Opendoor chose the SPAC route, pursuing funds from Palihapitiya, BlackRock and Healthcare of Ontario Pension Plan rather than a “cavalcade of Wall Street funds.”

Numbers To Consider

  • The investment amounts to more than $1 billion, with Opendoor receiving $414 million from capital generated from Palihapitiya’s SPAC IPO.
  • A group of investors, including Palihapitiya and funds managed by BlackRock, agreed to invest another $600 million through a PIPE.
  • Shares of Social Capital Hedosophia II rose 34.5 percent on the announcement.

Justin Oh’s Two Cents

Opendoor, Redfin, and Zillow have ambitions of using AI and machine learning to make buying and selling homes more efficient and eventually become the middleman between all real estate sales and purchases, and I am rooting for them. I have always disliked the real estate market’s inefficiency, with exorbitant 6 percent real estate agent fees every time someone sells a home. If someone has $100k equity in a $400k house, they have to pay $20k+ in broker fees to sell it. But unfortunately, it’s a hugely capital intensive endeavor to be able to buy millions of homes every month, renovate them, and sell them, all for a slim profit margin of 5 percent. I am also aware that buying and selling a home is intensely personal and requires physical showings. My view is that the “transformation” will not be a quick or complete one; technology will enable automated selling and self-showings of buyers (possibly displacing many real estate agents), but it will take at least a couple of decades to take meaningful market share.

Read More: (CNBC)

FTC Preparing Possible Antitrust Suit Against Facebook

After a year spent investigating concerns that Facebook has been using its “powerful market position to stifle competition,” the Federal Trade Commission is gearing up to file a possible antitrust lawsuit against the social media giant by year-end.

Why It Matters

It’s not entirely clear what kind of complaint is being considered.

  • According to WSJ, details of the FTC’s “likely legal theories in any Facebook lawsuit couldn’t be learned.”
  • Last year, Facebook disclosed it was under investigation by the FTC and WSJ previously reported that one of the focuses is the tech giant’s past acquisitions of potential competitors.
  • The FTC has “blessed” Facebook’s expansion through acquisitions in the past, including its purchase of WhatsApp in 2014.

Facebook is still making its case, arguing its actions aren’t anticompetitive and have improved the user experience.

  • FTC staffers are continuing to inquire about past acquisitions and how Facebook manages its platform with app developers.
  • The probe has advanced to the late stages, and even CEO Mark Zuckerberg has provided testimony to the commission.
  • In a past probe on Facebook’s privacy practices that resulted in a $5 billion settlement, the FTC didn’t speak with Zuckerberg.

A loss could weaken Facebook’s dominant position and alter the social media space.

  • Remedies designed to promote competition could range from operational restrictions to compelling Facebook to break off pieces of its business.
  • Of course, the FTC can’t dictate such changes. It would have to prove Facebook violated federal antitrust law and that the changes were necessary.
  • A case against Facebook would “open up a big second front in the government’s pursuit of Big Tech.” The Justice Department is planning an antitrust lawsuit against Google.

No final decision has been made yet.

  • The FTC doesn’t always bring cases even when making preparations to do so. After a lengthy investigation into Google in 2013, it decided against filing an antitrust complaint.
  • However, a case like this would timely take years to resolve, “meaning the officials who bring a lawsuit may not be around to see its conclusion.”
  • The FTC does have the option to sue Facebook in federal court or its in-house legal system, with the latter giving them the advantage of writing the first legal decision in the case.

Numbers To Consider

  • Facebook stock opened at $267.29 Wednesday and currently has a market cap of $768.6 billion.
  • As of the end of the second quarter, Facebook has 2.7 billion users worldwide.

Read More: (WALL STREET JOURNAL)

Number Crunch: Snowflake Hits The Public Market

Snowflake, a cloud computing rising star and Silicon Valley darling, arrived on the New York Stock Exchange on Wednesday, “joining a frenzied IPO market as the biggest technology issue so far this year.”

  1. The IPO priced at $120-a-share, which was driven above Snowflake’s target range of $100 to $110 by investors “hungry for a piece of the fast-growing company.”
  2. Snowflake, which offers business cloud-based data management, has a valuation of approximately $33 billion based on that pricing. Earlier this year, it was valued at $12.4 billion after a private funding round.
  3. This year is poised to be one of the “biggest money-raising years for new issues since the tech boom of 2000, according to Dealogic.” Companies in the U.S. have raised more than $78 billion in their IPOs through last week. Snowflake is the second-largest company to go public in 2020 after Quicken Loans parent Rocket Cos.
  4. Snowflake’s revenue grew 174 percent year-over-year in its last fiscal year ending in January, but its net loss also increased, and the company remains unprofitable. Bolstering interest in the firm is concurrent $250 million investments from Warren Buffett’s Berkshire Hathaway and Salesforce’s corporate investment arm, Salesforce Ventures.

Bonus: Developer tools company JFrog also began trading on the stock market Wednesday morning.

  1. JFrog priced its IPO at $44 per share, a 26 percent rise from the midpoint of its expected price range.
  2. At those numbers, the company will be valued at $4 billion. It was valued at $427 million after a private funding round in October.
  3. JFrog’s business has grown through the Covid-19 pandemic, increasing revenue in the first half of the year by 50 percent to $69 million. Its share price suggests the firm trades at 35 times last year’s revenue.

Justin Oh’s Two Cents

It looks like $SNOW hasn’t started trading yet and quotes are coming in at $180+ per share. I’m not buying at such an inflated price and will wait for the stock to calm down.

Read More: (WALL STREET JOURNAL)

Worth Your Time

Deal Switch-Up: If the Oracle-TikTok deal goes through, ByteDance would be able to breathe a sigh of relief. Under the proposed arrangement, TikTok’s global business would become a company based in the U.S., but ByteDance would retain a majority ownership stake. Oracle would jump into a minority stake in that company and be TikTok’s U.S. technology partner. The deal is awaiting review, and a recommendation from the Committee on Foreign Investment in the U.S. could announce a recommendation by Sunday. (WALL STREET JOURNAL)

The Plot Thickens: Days after short-seller Hindenburg Research released a scathing report calling Nikola Motors an “intricate fraud,” the Justice Department has joined the SEC in examining the electric vehicle company. Federal prosecutors are looking into allegations that Nikola “misrepresented progress it made in developing key technology core to releasing new models.” It’s unclear how advanced the Justice Department’s probe is, and both federal inquiries may not produce and formal allegations of wrongdoing. (WALL STREET JOURNAL)

A New Hope: Drugmaker Eli Lilly & Co. announced positive results from a study testing the efficacy of an anti-body-based drug that it’s co-developing, derived from an early U.S. survivor’s blood. The treatment reduced hospitalization rates in subjects who received the medications compared to those who got the placebo. The company said the interim results reinforce the drug’s potential and that it will seek emergency approval in discussions with regulators. The drug is already being manufactured, and 100,000 doses could be ready by the end of this year. (WALL STREET JOURNAL)

Tidbits

U.S. retail spending had its fourth consecutive monthly increase, rising by 0.6 percent, but the sluggish pace and expiration of some unemployment benefits indicate a slowing recovery in the sector.

Apple shares fell Tuesday, signaling investors’ disappointment with the tech giant’s online release event that featured a new watch, iPad, virtual fitness service and bundled subscription options.

Alibaba unveiled its own smart apparel factory Wednesday, paving the way for a new business opportunity to sell its technology services to revolutionize the old-fashioned Chinese manufacturing sector.

Sequoia Capital reportedly considered forming a SPAC to jump in on the record hype for “blank check” IPOs.

Norwegian online learning platform Kahoot, which is now valued over $2 billion, announced its $33 million acquisition of Danish startup Actimo to boost its business among corporate customers.

E-bike startup VanMoof has raised $40 million in Series B financing, bringing its total to $73 million raised as bike commuting grows in popularity due to the Covid-19 pandemic.

Abu Dhabi’s sovereign wealth fund has taken a 5.1 percent stake, worth $615 million, in Cheniere Energy, the largest U.S. exporter of liquefied natural gas.

“Pension and sovereign wealth funds are set to offload about $200 billion of equities as they rebalance their portfolios, posing a risk for global shares.”

A Couple Cents Featured

Here’s Justin Oh’s rundown on the hot cloud computing IPO Snowflake, which started trading under the ticker $SNOW Wednesday.
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Responses

  1. What are people’s thoughts on the Opendoor’s valuation? At first I was surprised to see a company that is losing money valued at 4.7B, but Zillow and Redfin are in similar positions in terms of their % losses relative to revenues and eventual ~5% target profit margins.

    Zillow’s 2020 run-rate revenue is about 3.2B and they are valued at 20B, 6.25X revenue. Redfin’s 2020 run-rate revenue is about 800M and they are valued at 5B, 6.25X revenue. Opendoor’s 2020 run-rate revenue is about 5B and they are valued at 4.7B if trading at $10 per share, about 1X revenue.

    I see they actually have 630M shares, so if Opendoor were to be valued at 6.25X revenue each share would trade at $49.6

        1. lol… i tell you what.. there is another company that started about 3 years ago doing the same thing BUT its decentralized on a blockchain.  if you are interested, check out IExec out of France. Snowflakes is the sexy pick because of their backers but IExec aint to shaby either.  

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