I believe that many of our blog readers have come across the real estate industry in various roles. The first association that comes to mind when we talk about real estate transactions is long paper contracts with small print. Complexity and paperwork are inherent in this area in every country in the world, and the United States is no exception.
Company Compass Inc. set a goal for itself to make the process of buying and selling real estate easy, simple and fast for all parties to the transaction. Compass Inc. filed an S-1 form with the SEC on March 1 for an IPO. The placement will take place on March 31st on the NYSE, and trading will begin on April 1st. Ticker assigned to the company “COMP“.
Business Compass Inc.
Compass Inc. has created an online platform for residential real estate agents that allows them to provide unique services to their clients (buyers and sellers). The platform is a complex of integrated software for working with marketing, parties to the transaction, the specification of real estate and providing brokerage services. Realtors got a tool for building their own network business for the sale of housing. With the help of Compass Inc. agents can serve more clients, save time and show more professionalism than their peers.
The business model of the company is based on the “win-win” principle. The success of Compass Inc. equates to the success of the agents who collaborate with her.
Successful realtors can create their own referral networks in the platform, which increases the volume of transactions in the system. The main clients of the company are the owners of real estate agencies. Compass Inc. provides its agents with analytics, the power of artificial intelligence and machine learning. This gives realtors a wide range of industry-specific opportunities.
Compass is regularly updating and improving its platform to improve the digitalisation and automation of residential real estate processes.
The company is represented in 20 states, which include 46 markets (metropolitan statistical areas). At the end of 2020, 19,385 agents were registered on the platform, of which 9,368 are the “founders” of their own referral networks (hereinafter, we will call such clients “main”).
The volume of real estate transactions that went through the Compass platform last year amounted to 152 billion USD. This represents about 4% of the entire US market. The growth of this indicator relative to 2018 is 400%. The company’s revenue is based on the commission on these payments. Key agent retention rates exceed 90%. About 88% of all clients of the company use the platform at least once a week.
With the Compass Concierge add-on, agents’ clients have access to interest-free home improvement loans, allowing them to sell their homes much faster and with a higher average bill. For all services of the company, realtors can go through a full training cycle from the company.
Market and Competitors Compass Inc.
According to a study by the US National Association of Realtors (NAR), over 5.6 million homes were sold for $ 1.9 trillion in 2020. The residential real estate market occupies the “lion’s” share in the structure of consumer spending in American households. According to Compass, the volume of commission payments in 2020 amounted to 95 billion USD. In general, the company estimates its address market in the United States at USD 180 billion, and in the world it reaches USD 570 billion. Over 90% of buyers and sellers work with real estate agents, with the majority re-referring to them in case of new transactions. Therefore, the relationship between the agent and the client is long-term.
There are no similar platforms in the market at the time of the Compass IPO. Now it is important for the company that as many agents as possible begin to use the platform to work with their clients.
Financial performance of the company
Like many tech companies, Compass Inc. does not generate net income. Therefore, let’s proceed to the analysis of revenue for the reporting period provided.
The company has provided a fairly detailed sales report since 2016. In 2020, the company’s revenue amounted to USD 3.72 billion. The relative growth in 2019 was 55.94%. Sales have grown almost 20 times since 2016. Given that the company is present in only 20 states, the growth potential of this indicator has not yet been exhausted.
The company’s revenue consists of a commission from turnover and commission for the services provided, as shown in the formula above. The model is quite simple and straightforward.
The company’s loss decreased in 2020 compared to 2019 by 30.36% and amounted to USD 270.2 million. If the trend continues, then in 3-4 years the company may receive its first net profit.
As you can see, the largest share in the company’s revenue is taken by the commission from the turnover. In 2020, its share was 82.16%, and in 2019 – 81.12%. There are 440 million USD in cash on the accounts of the company. The total liabilities of the company amount to USD 741 million.
Thus, we conclude that the company’s success depends entirely on the rate of its expansion in the targeted market. Its slowdown may lead to an increase in losses and the need for additional financing. We will talk about the strengths and weaknesses of the company in more detail below.
Strengths and weaknesses of Compass Inc.
When we have studied all the details of the business model and financial statements, we can highlight the benefits and risk factors of investing in the company’s securities. To the undoubted “pluses” of Compass Inc. we can attribute:
- The uniqueness of the platform: there are no analogues on the market yet.
- The company’s clients are mostly motivated real estate agents who correctly assess the advantages and benefits of working with Compass.
- The company provides its clients with unique services in the form of analytics, artificial intelligence and machine learning.
- Availability of our own industry ecosystem.
- The company’s share in the real estate market is 4% and is growing at a rate of over 50% annually.
- Expandability due to customer referral networks.
The risk factors for investing in company shares are:
- The company’s performance depends on the Fed’s monetary policy.
- Heavy reliance on real estate agents who have traditional analog alternatives to the company’s services.
- Such a high rate of growth of the company’s revenue will decline.
- The company is unprofitable and does not pay dividends.
IPO details and capitalization estimate of Compass Inc.
The company intends to sell 36 million common shares at prices ranging from USD 23 to USD 26 per unit. The supply volume may amount to USD 882 million, with a capitalization of USD 9.75 billion. The placement was underwritten by Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Barclays Capital Inc., UBS Investment Bank and Deutsche Bank Securities.
To assess the potential capitalization of Compass Inc. we use the ratio (multiplier) P / S (capitalization / revenue). At the time of the IPO, it is 2.62. For technology companies with such revenue growth rates, the average P / S is 5. Thus, the upside (growth potential) of the company’s shares is 90.84% (5 / 2.62 * 100%). Therefore, this company will be interesting for both short-term and long-term investment.
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