Please ensure Javascript is enabled for purposes of website accessibility

Is Compass Stock a Buy After Its IPO?

By Trevor Jennewine - Updated Apr 8, 2021 at 7:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Investing in IPOs can be risky, but this tech company has a big market opportunity.

Last year existing-home sales in the U.S. jumped 5.6%, according to the National Association of Realtors. Despite the pandemic, low mortgage rates sparked strong consumer demand, driving prices through the roof (no pun intended). And so far 2021 looks like another good year for the housing market.

With its initial public offering (IPO) last week, Compass (COMP 1.71%) became the latest player to enter the real estate fray as a public company. Its business benefits from a massive market opportunity, but it also faces tough competition. So is the stock a buy? Let's dive in.

The market opportunity

Compass focuses on empowering real estate agents rather than replacing them. The company's cloud-based software platform is designed to help agents build customer relationships, work more efficiently, and grow their businesses.

Beige house with a "For Sale" sign in the front yard.

Image source: Getty Images.

For instance, the Compass platform uses AI-powered analytics to surface lead ideas, helping agents identify potential buyers and sellers. This allows them to focus on high-value clients (e.g. clients that the platform identifies as "likely to sell"). In addition, the platform allows agents to create and launch marketing campaigns across channels like digital, social, email, and video. Agents can even use the platform to conduct virtual tours and livestream open houses.

Compass primarily generates revenue through brokerage commissions, though it offers title, escrow, and mortgage services as well. At the end of 2020 the company had a presence in 46 markets across the United States.

In total, management estimates the company's addressable market in the U.S. at $180 billion, representing a combination of commissions, closing services, and marketing services. Notably, the company puts its global market opportunity at $570 billion.

The competition

While Compass believes agents will continue to play a critical role in residential real estate, several key competitors see things differently.

For instance, rivals like Redfin and Zillow Group are trying to disrupt the industry with a novel approach: iBuying. Both of these companies buy houses directly and resell them through their own marketplaces. This eliminates the need for real estate agents, with the goal of simplifying the process for consumers.

Additionally, while Redfin also provides brokerage services, it employs its own agents and pays them salaries (rather than commissions). That allows Redfin to keep its commission fees 1% to 2% lower than those of other brokerage firms, then pass those savings on to consumers. Compass doesn't offer this advantage.

Even so, Compass agents assisted in $152 billion in residential real estate transactions in 2020. That gives the company a 4% market share in the United States. By comparison, Redfin's brokerage service facilitated $37 billion in transactions, giving the company a 1% market share.

Moreover, 89% of home sellers and 88% of home buyers still use real estate agents -- and those numbers have changed very little over the last decade. From that perspective, Compass' business model has merit, and its size gives it an advantage.

Financial performance

Since 2018, Compass has delivered impressive top-line growth, easily outpacing rivals like Redfin and Zillow Group. As a result, its market share has quadrupled over that period.

Revenue

2018

2020

CAGR

Compass

$885 million

$3.7 billion

104%

Redfin

$487 million

$886 million

35%

Zillow

$1.3 billion

$3.3 billion

59%

Data source: Compass, Redfin, and Zillow Group SEC filings. CAGR = compound annual growth rate.

Despite growing its top line quickly, Compass' operating cash flow came in at minus $58 million last year. In other words, the company is burning money. By comparison, Redfin and Zillow Group generated $61 million and $424 million in operating cash flow, respectively. That means both companies are more profitable than Compass.

The verdict

Investing in IPOs can be risky. In general, I think it's best to wait a few quarters before making the decision to buy. That gives the market time to digest any news, and it gives investors a chance to learn more about the company. Sometimes the public spotlight illuminates problems that weren't obvious prior to the IPO.

That being said, Compass has a big market opportunity and a relatively strong competitive position. If you want to pick up a few shares now, that should be fine. But wait for more information before building a larger position.

If Compass ends up being a long-term winner, waiting a few months won't be the end of the world. But if the IPO was mispriced or something else goes wrong, you could lose a lot of money by jumping in too soon.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Compass, Inc. Stock Quote
Compass, Inc.
COMP
$5.36 (1.71%) $0.09
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
ZG
$41.18 (6.44%) $2.49
Zillow Group, Inc. Stock Quote
Zillow Group, Inc.
Z
$42.10 (6.64%) $2.62
Redfin Corporation Stock Quote
Redfin Corporation
RDFN
$11.16 (7.83%) $0.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
338%
 
S&P 500 Returns
119%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/18/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.