Weekly Reads - September 19, 2022
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The iBuying business model has taken a major hit over the last year with Zillow abandoning its iBuying operation and now OpenDoor Technologies struggling to turn profits on a significant portion of their transactions. OpenDoor a pioneer of data driven house flipping has lost money on 42% of its transactions in August with markets such as Los Angeles and Phoenix seeing losses on 55% and 76% of transactions respectively. The company has told investors it expects to lose as much as $175 million in adjusted EBITDA in the third quarter citing longer hold times for their inventory and worsening real estate fundamentals. The iBuying business model requires OpenDoor to acquire homes, make repairs to improve the marketability of the homes, and then resell the home within a few months of the initial purchase. This model is highly speculative with iBuying raking in easy profits during the COVID fueled home boom and now generating mass losses as home affordability and mortgage rates become untenable for buyers leading to widespread declines in housing prices. OpenDoor was caught in the housing bubble, buying homes while prices rose and now are being forced to sell these homes at a discount to their purchase price. The company has not canceled any ongoing purchase contracts they had with homeowners showing their willingness to take these losses because they viewed it as an investment in the company’s brand. With shares down 73% YTD the company is working to finish selling its current inventory to avoid further impact from negative shifts in the housing market and eventually return back to buying and selling homes profitably.
South Korea is planning to announce financial reforms later this year as to way to reduce the “Korea discount” in stock markets. The “Korea discount” refers to the lower valuations given to South Korean companies relative to global peers due to factors such as: low dividend payouts, dominance of conglomerates, and geopolitical risks stemming from North Korea. Government officials are aware of the “Korea discount” and now are looking into adopting policies that will make South Korean markets much more attractive to global investors. Some policies regulators are looking into include dividend policy, changing registration requirements for foreign investors, and offering more corporate filings in English. This reform seems to be a priority for South Korea with President Yoon Suk-yeol pledging regulation reform with the goal of revitalizing domestic markets. If these reforms eliminate the inconveniences for global investors to trade in the country, South Korean markets could see a wave of newfound interest and capital helping market valuations rise.
The IOS16 rollout is bringing in a ton of interesting new features to compatible iPhones with the launch of ApplePay Later being one of the major features. Apple Pay Later is Apple’s “buy now, pay later” (BNPL) service, a feature within Apple Wallet allowing users to break a purchase into four equal payment spread over six weeks. This new feature will not require stores and merchants to implement any changes in order to accept these payments with transactions occurring the same as other ApplePay methods with the difference being how the back-end works. Apple is working with MasterCard Installments, MasterCard’s white-label BNPL service, which will provide the back-end payment service. Apple has created its own financial subsidiary which will handle the loans and credit checks for its BNPL service choosing to take on credit risk versus working with a financial partner. With millions of users using Apple Pay already, Apple Pay Later could be the upstart BNPL service that could chip away market share from established leaders such as Affirm, PayPal, and Afterpay.