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Compass Goes Public -- Should You Invest?

[Updated: Mar 08, 2021 ] Mar 08, 2021 by Deidre Woollard
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At the start of 2021, we learned that Compass, a fast-growing residential real estate brokerage, was planning to go public in 2021. But should you add it to your portfolio of real estate stocks? Originally, Compass filed its S-1 confidentially, but it's now available, which gives us more information on how Compass has grown. Beginning in 2012 as Urban Compass, Compass has raised over $1.5 billion in funding, including significant investments from SoftBank's Vision Fund (OTCMKTS: SFTBY).

Rapid growth in a growing market

Like most other real estate brokerages in 2020, Compass benefited from the robust market that dominated the second half of the year. Its nearly 19,000 agents achieved over $300 billion in gross transaction value. As the largest independent real estate brokerage, Compass has a 4% market share. According to data gathered by Real Trends using 2019 data, Compass was ranked fifth in the country for transaction sides behind HomeServices of America, Realogy (NYSE: RLGY), eXp World Holdings (NASDAQ: EXPI), and Hanna Holdings. Compass's revenue rose 56% from $2.4 billion in 2019 to $3.7 billion in 2020. Net losses pared down from $388 million to $270.2 million.

In the intro to the S-1, CEO Robert Reffkin wrote of deciding to found the company for real estate agents like his mother Ruth, who he says struggled to "grow her business because she didn't have the right tools or support."

Compass has invested heavily in technology both through acquiring companies like real estate CRM Contactually as well as hiring over 650 product and engineering employees in New York City; Seattle; Washington, D.C.; and Hyderabad, India. However, its primary business is still the traditional model of real estate commissions. Compass estimates that approximately $95 billion in real estate commissions were paid in 2020, and it's looking for a larger share of that market both by bringing on more agents and by increasing agent productivity.

Unlike some of its competitors, Compass has limited its growth to major urban areas and is focused on the upper end of the real estate market. Much of its growth has been through acquisitions. It achieved market share in many cities by acquiring small independent brokerages and aggressively recruiting top-producing agents.

What to look out for

As Matt Frankel noted in his article, this company's results should be taken with a grain of salt. In March 2020, when the real estate market ground to a sudden standstill, Compass laid off 15% of its staff. It was far from alone in laying off workers during that time period; many other real estate companies made similar moves.

Anyone who has studied real estate cycles knows that real estate is subject to highs and lows. Compass began in 2012, so it has never known a true down market. A significant and prolonged downturn could heavily impact the business. If Compass is still operating at a loss in a heated market, how will it perform in a sluggish one? One of Compass's biggest rivals, eXp, recently announced $1.8 billion in revenue and transaction volume of $72.2 billion in 2020. It achieved a profit of $31 million for the year compared to a loss of $9.6 million in 2019.

It is also going public at a time when agent commissions are facing increasing downward pressure. This means that some of Compass's projections about future revenue might be too rosy.

Another concern is acquisitions. The secret to Compass's growth has been the acquisitions of agents, brokerages, and technology companies. In 2020, it slowed down this process although it still managed to purchase Modus Technologies, a title and escrow company. In 2021 it has already purchased brokerage Bold New York in a deal that could be worth $4 million and acquired KVS Title for $52 million. While acquisitions are a pathway toward fast growth, Compass has struggled to pull together all of its technology and brokerage cultures into a single unified company.

The Millionacres bottom line

Compass has demonstrated rapid growth and a strong track record of high-profile acquisitions. As the company matures, it will need to be able to expand from the inside and develop some of its technology offerings into revenue-generating businesses. A successful IPO would be a win for SoftBank, which owns 35% of Compass's Class A shares, but it may be a while before investors see a strong return on their investment.

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Deidre Woollard owns shares of Realogy Holdings. The Motley Fool owns shares of eXp World Holdings. The Motley Fool has a disclosure policy.