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Lofty price expectations often melt away when faced with the harsh heat of the market. That reductive reality occurs whether selling a house or a company. SoftBank-backed home real estate brokerage Compass began trading on Thursday after weaker than hoped pricing.
While the company’s equity is still valued at $7bn on an undiluted basis, anaemic demand forced underwriters to slash the listing price by a third, as well as the number of shares on offer. Growth companies have begun to face some backlash from public investors this year. A disappointing debut for Compass raises simple questions about a purported radical business model that is more traditional than it seems.
Compass claims its software offers agents advantages over rivals, making them more knowledgeable and effective. True, 2020 revenues of $3.7bn were 300 per cent higher than just two years before. Compass serves 46 US markets. While plenty of geographic expansion opportunities exist, Compass says last year it had grabbed an impressive 4 per cent, or $152bn, of total residential real estate transactions.
Sceptics will note that Compass has used venture capital cash to poach teams of agents to buy that share, at great expense. Between 2018 and 2020, growth in its so-called principal agents more than tripled. Last year the company lost nearly $300m after tax. Even its adjusted ebitda was negative. For every dollar of revenue, more than 80 cents go to commissions owed to its brokers. Separate marketing and overhead expenses chew up the rest of revenues.
Compass’s traditional sales model, whether it uses software or not, competes with well-established online sites such as Zillow and Opendoor. Another agent-led listed company, Realogy has an aggregate value similar to Compass. But its annual revenue is $6bn, generating $500m of free cash flow last year. Realogy and Compass, perhaps unsurprisingly, are locked in litigation. Each side claims the other has engaged in unfair business practices. Market participants can be as sharp-elbowed as they are unforgiving.
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