What happened
Shares of Compass (COMP -2.40%) were pulling back again last month after the disruptive real estate brokerage posted disappointing results in its second-quarter earnings report. It also announced a cost-cutting program as the company reckons with the downshift in the real estate market.
According to data from S&P Global Market Intelligence, the stock finished August down 25%. As you can see from the chart below, the stock actually gained in the first half of the month until it reported earnings on Aug. 15 and continued to slump from there.
So what
Compass, which is now the U.S.'s largest real estate brokerage by sales volume, caught a brief tailwind in the first half of the month after the July jobs report showed the economy remained strong even in the face of rising interest rates.
However, the momentum began to shift on Aug. 16, when the stock fell 5% after the company reported second-quarter earnings. Compass said revenue in the quarter increased just 4% to $2.02 billion, which missed estimates at $2.12 billion.
Its market share over the last year rose 50 basis points to 4.6%, a sign the company is still growing relative to the market. Transactions were up 2% in the quarter to 66,846, and gross transaction value was flat at $76.8 billion.
On the bottom line, adjusted EBITDA shrank from $71 million to just $4 million, and the company posted a GAAP loss of $0.24 a share, compared to a loss of $0.02 per share in the quarter a year ago, and expectations of a $0.14 per-share loss.
The company also announced a new cost-savings program with a goal of delivering $320 million in annual savings, as well as free cash flow profitability by next year. Over the long term, it expects an adjusted EBITDA margin of 10% and free cash flow margins of 8% to 9%.
For the current quarter, management expects a sharp slowdown in the real estate market, calling for revenue of just $1.4 billion to $1.5 billion, well below Q2 results and the analyst consensus at $2.11 billion. It also expects an adjusted EBITDA loss of $60 million to $85 million for the quarter.
Over the rest of August, the stock continued to slide as investors reacted to the earnings report, and the broad market fell after Fed Chair Jerome Powell said that rising interest rates could cause economic pain.
Now what
Shares of Compass have fallen sharply since the IPO last year as the company's claims of disrupting the real estate market have made up for its losses on the bottom line.
Compass has built its own in-house software platform, but it's unclear if that's sufficient to differentiate the company from its peers. Keep an eye on the free cash flow profitability target next year, as the company will have to hit that, or at least approach it, in order for the real estate stock to make a turnaround.
