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Saturday, January 28, 2023

Compass Went Public 2 Years Ago. Can It Recover From Its Stock Slump?

This report is available exclusively to subscribers of Inman Intel, a data and research arm of Inman offering deep insights and market intelligence on the business of residential real estate and proptech. Subscribe today.

When Compass went public way back in April 2021, the world was a very different place.

At the time, the coronavirus pandemic was still raging, but it was clear by that point that the crisis wasn’t going to tank the real estate industry. In fact, one year in, the pandemic was actually fueling home purchases by enabling remote work and driving down interest rates.

At the same time, big and publicly traded real estate companies seemed unstoppable. Opendoor — which like Compass was funded in part by venture capital firm Softbank — had gone public just four months earlier and saw its shares surge over the following months.

Other companies experienced similar gains. In late February 2021, Zillow shares were fetching nearly $200. Redfin shares almost hit $100. EXp neared $80. This happened in the period immediately preceding Compass’s initial public offering, and so it would have been a reasonable assumption to conclude that Wall Street had an insatiable appetite for real estate stocks.

But as it turned out that assumption would’ve been wrong.

Even by the time Compass held its IPO real estate shares were declining. But the following two years have been a blood bath. Redfin shares fell to barely more than $3 at one point. Zillow shares dropped to roughly an eighth of their all-time high price. Shares in eXp dipped below $10. Opendoor, the canary in the coal mine for venture-backed pandemic-era IPOs, saw shares briefly drop below $1.

In the midst of this carnage, Compass suffered as well. In fact, some temporary upticks notwithstanding, the brokerage’s share price has been on an overall downward trajectory pretty much since the beginning. Recent weeks have been somewhat kinder to the company’s share price, with an upward trend in the overall market helping lift it into the mid $3 range as of mid-January. But it’s still far below what it was after the IPO.

All of this raises questions: Was Compass brilliant to go public in the waning days of a bull market? Or, was it in retrospect an error? Is Compass struggling in the stock market because everyone is struggling, or is the company uniquely underperforming?

Why the focus on Compass? In short, it’s because Compass is a behemoth, and as of last year also the largest company of its kind. And to get a sense of what’s going on, Inman combed through stock market data and reached out to a group of industry experts, observers and analysts.

Unfortunately, the experts were not unified in what they think Compass’s ride in the stock market means. Some were fairly bullish on the company, while one was highly critical. But overall, most of those who spoke with Inman felt that Compass at least isn’t going away any time soon.

Compass’s performance compared to others

To start out, the chart below looks at Compass’s stock market performance since the company went public in April 2021 through the present. As mentioned above, the trend is clearly downward — though the share price has inched up somewhat in recent weeks.

Credit: Jim Dalrymple II

Next up, the graph below shows Compass (blue) plotted alongside the Nasdaq Composite (black) going back to April 2021 when the company went public.

Credit: Barchart

The point of the graph above is to get a sense of how the company’s performance and trajectory has compared to the broader market. The graph below shows a similar thing, but this time plotting Compass (blue) alongside the S&P 500 (black).

Credit: Barchart

These graphs show that Compass’s shares were falling at a time when the rest of the market was moving upward, and that Compass’s dips were also more profound than those of the broader market.

But that’s far from the end of the story.

A big part of the Compass brand has involved framing the company as a technology firm as much as a real estate brokerage. The investment from Softbank — which typically throws its venture capital at techie startups — helped sell that story. But so did Compass’s willingness to build its own software and hire its own team of engineers. A proprietary technology ecosystem has additionally been a big selling point in Compass’s aggressive recruiting efforts, and that is even more the case now that the brokerage has ditched its lucrative cash and stock-based sign-up incentives.

So a better comparison for Compass than the broader market is perhaps other tech-enabled real estate companies. To that end, the graph below plots Compass’s share price against those of Zillow, Redfin, Opendoor and Offerpad. The graph begins in April 2021 when Compass went public.

Credit: Jim Dalrymple II

What jumps out from this graph is that Compass doesn’t appear to be especially unique and all of the real estate tech firms have seen dramatic losses in market value.

Over the last year alone, Compass stock was down in mid-January just over 80 percent. But significantly, Redfin, Opendoor and Offerpad all suffered almost the exact same drops in their stock prices over that period. Zillow fared better, only dropping about 22 percent over the last year. But a year ago the company’s share price was already less than a quarter of its all-time high from 2021.

Of course, Compass isn’t just a technology company, it’s also a brokerage. In fact, some experts have suggested the firm needs to lean into that identity as it moves forward — a path Compass itself seems to be embracing given recent cuts to its technology personnel.

So, how does Compass’s performance in the stock market compare to other more straightforward brokerages and franchisors?

The graph below plots Compass’s share price since its IPO against those of Anywhere and RE/MAX.

Credit: Jim Dalrymple II

Here, again, Compass’s track record doesn’t look so atypical. Its losses began earlier and were more steady than those of Anywhere in 2021. Notably, Compass started its journey in the market with a share price above Anywhere’s, but soon saw Anywhere overtake it. Looking just at the middle of 2021, it appears that the traditional brokerages and franchisors might be pulling ahead.

But 2022 caught up with everyone and Anywhere and RE/MAX both eventually saw their share prices dip similarly to those of Compass, though as of mid-January, Compass’s shares remained cheaper than those of the two legacy brands.

Finally, the graph below compares Compass and eXp World Holdings, the parent company of brokerage eXp Realty.

Credit: Jim Dalrymple II

Compass and eXp have very different business strategies — eXp operates a low-overhead model, Compass is focused on luxury and high-touch service — and they have very different agent counts. But they’re both companies that combine technology with brokerage operations and which emerged in the post-Great Recession boom years. They also both landed on the top of the T3 Sixty Mega 1000 for largest brokerages. Which is to say, the two companies are often broadly grouped together.

If we were writing this story one year ago, it might have led to very different conclusions: At the beginning of 2022, Compass’s share price was on its way down while eXp’s had just experienced a period of recovery.

But the two companies’ share price trajectories didn’t diverge forever, and over the course of 2022 eXp’s fell too.

In any case, one takeaway from these graphs is that the story of Compass’s bumpy ride on the stock market is also to some extent the story of housing companies generally. It has been a rough two years for everyone’s share price, and that happens to be the period in which Compass has been a publicly traded company.

Point and counterpoint: Compass was smart to go public when it did

The industry observers who spoke with Inman about Compass were divided on the wisdom of the company’s IPO. Among them, analyst Mike DelPrete argued that because Compass was backed by venture capital, it basically had to go public at some point. That is, after all, how venture capitalists typically recoup and profit from their investments.

Mike DelPrete

DelPrete also noted that at the time of Compass’s IPO, the company had been around for nearly a decade, meaning pressure would have been mounting.

Facing that reality, DelPrete argued that Compass probably pulled the trigger at the right time.

“You know what,” DelPrete told Inman, “in retrospect the timing was probably fantastic. They filled up their bank account.”

The idea here is that waiting to IPO until any point up until the present would only have cost Compass money. So, if you have to go public you might as well do it when prices are high — especially because, in DelPrete’s reasoning, a falling stock price shouldn’t impact day-to-day operations.

“I don’t think it’s going to limit their ability to function as a company,” he said, adding that Compass is in a similar boat to many other companies. “Everybody’s stock price has been absolutely hammered.”

Bernie McTernan

Bernie McTernan, a senior analyst at Needham & Company, made a similar point.

“If you look at their stock relative to digital housing peers, it’s not that far off,” he said.

McTernan went on to attribute Compass’s share price performance to a boom market that ultimately went bust, adding that higher interest rates among other factors have driven investors to the sidelines when it comes to real estate stocks.

Justin Ages, an equities research analyst at Berenberg Capital Markets, also generally agreed. He didn’t see Compass’s lower stock price as a major problem for the company day-to-day, though he did say that the brokerage might have been doubly dinged for having feet in both the housing and technology sectors.

Justin Ages

“They’re billing themselves as tech companies so they’re also hurting from tech evaluations being down,” Ages said, referring to both Compass and eXp.

But his ultimate takeaway was similar to DelPrete’s: It’s best to go public when prices are high and, in this case, the housing market is hot.

“I would imagine it was probably a good decision,” he said of Compass’s IPO. “Valuations were sky high and you want to take a company public and get the most valuation.”

Point and counterpoint: Compass erred in going public

Not everyone, however, was as positive about Compass’s decision to go public.

David Trainer — CEO of research and analysis firm New Constructs — was strongly opposed to Compass IPO. Trainer didn’t mince words while speaking with Inman, saying he “didn’t think their business model would ever work” and that going public was really about “bailing out Softbank” after the venture fund lost money on its investment in WeWork.

David Trainer

“We don’t think this business should have ever been IPOed,” Trainer added of Compass.

He went on to say Compass was “overvalued” at the time of its IPO and called into question the company’s bonafides as a technology firm, describing it as a “so-called tech stock.” Trainer also didn’t think Compass’s status as a brokerage was enough to reverse the company’s stock market fortunes.

“It’s a very crowded marketplace in brokerage,” Trainer said. “And it’s not exactly a super high profit business. Their business model, we called it a Catch-22, is to either lose money or lose market share.”

Trainer’s view was a contrarian one compared to the other analysts who spoke with Inman, but it’s one he’s held since the beginning; just before Compass went public, Trainer’s company put out a report on the firm calling its IPO valuation “off the map.” The report argued that Compass’s tech was not unique and that “paying for market share isn’t sustainable.”

“Currently, the company looks more like a traditional brokerage with flashy marketing, whose only advantage is an unlimited ability to burn cash,” the report also noted.

For Trainer then, Compass’s struggles in the stock market are indicative of larger issues having to do with the company’s business model and public branding. Trainer also indicated that the last two years have only further convinced him that the report was right. And while he said anything could happen and it was possible Compass could solve those issues, he wasn’t convinced that would actually happen.

“I don’t really see any way out of it,” Trainer added.

Russ Cofano

Russ Cofano, an industry veteran currently serving as CEO of Collabra Technology, was less bearish on Compass than Trainer, but he did note that as company’s share prices fall they become more vulnerable to takeovers and acquisitions — something Compass has so far vehemently denied is on the table.

Cofano also said Compass’s share price could reverberate into other parts of the business, such as the brokerage’s ability to recruit more agents.

“I guarantee that everyone that Compass is recruiting against is using public information about the company and its stock price against them,” he said.

So who is right? Is Compass a victim of investors’ general aversion to housing stocks? Or is the company fundamentally unique — and challenged?

Time will tell. And it may take a while at that; with most companies’ shares near the bottom, it’s difficult to know who might ultimately pull ahead.

For his part though, Cofano doesn’t ultimately believe Compass is going away any time soon. And even if major changes do happen, he sees the brand living on well into the future.

“Compass is not going to disappear,” Cofano said. “The brand and the organization are not going away.”

Email Jim Dalrymple II



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