Is Compass Stock a Invest in Just after Its IPO?

Previous calendar year present-home income in the U.S. jumped 5.6%, in accordance to the Nationwide Affiliation of Realtors. Irrespective of the pandemic, very low mortgage loan fees sparked robust shopper need, driving costs by the roof (no pun meant). And so far 2021 seems to be like another superior year for the housing current market.

With its original community presenting (IPO) last 7 days, Compass (NYSE:COMP) became the newest player to enter the genuine estate fray as a general public firm. Its small business rewards from a large industry prospect, but it also faces hard level of competition. So is the stock a buy? Let’s dive in.

The market place option

Compass focuses on empowering authentic estate agents relatively than replacing them. The company’s cloud-based program platform is designed to assistance agents construct consumer relationships, function extra efficiently, and improve their organizations.

Beige house with a

Graphic source: Getty Visuals.

For instance, the Compass system makes use of AI-powered analytics to area direct thoughts, serving to agents detect potential buyers and sellers. This permits them to concentration on significant-worth shoppers (e.g. shoppers that the system identifies as “very likely to offer”). In addition, the system enables agents to create and launch advertising and marketing strategies across channels like digital, social, e-mail, and video clip. Agents can even use the platform to perform virtual tours and livestream open up residences.

Compass largely generates profits by brokerage commissions, although it features title, escrow, and home loan companies as very well. At the conclusion of 2020 the enterprise experienced a existence in 46 markets across the United States.

In full, administration estimates the firm’s addressable industry in the U.S. at $180 billion, symbolizing a mix of commissions, closing products and services, and promoting expert services. Notably, the organization puts its world sector opportunity at $570 billion.

The opposition

Though Compass thinks brokers will carry on to engage in a crucial purpose in residential genuine estate, various important competition see things differently.

For occasion, rivals like Redfin and Zillow Group are trying to disrupt the business with a novel technique: iBuying. The two of these firms obtain homes immediately and resell them through their individual marketplaces. This eradicates the have to have for real estate brokers, with the objective of simplifying the procedure for customers.

Moreover, when Redfin also delivers brokerage companies, it employs its very own agents and pays them salaries (alternatively than commissions). That permits Redfin to retain its fee charges 1% to 2% reduce than those of other brokerage companies, then go those people savings on to individuals. Compass would not offer this benefit.

Even so, Compass brokers assisted in $152 billion in residential actual estate transactions in 2020. That offers the enterprise a 4% current market share in the United States. By comparison, Redfin’s brokerage company facilitated $37 billion in transactions, supplying the company a 1% sector share.

Additionally, 89% of home sellers and 88% of dwelling purchasers however use actual estate brokers — and those figures have improved really small in excess of the previous decade. From that viewpoint, Compass’ company design has merit, and its size gives it an benefit.

Money effectiveness

Due to the fact 2018, Compass has sent remarkable best-line progress, simply outpacing rivals like Redfin and Zillow Group. As a end result, its market share has quadrupled over that time period.






$885 million

$3.7 billion



$487 million

$886 million



$1.3 billion

$3.3 billion


Facts resource: Compass, Redfin, and Zillow Group SEC filings. CAGR = compound once-a-year development level.

Regardless of growing its top line promptly, Compass’ functioning income circulation arrived in at minus $58 million last 12 months. In other words, the corporation is burning revenue. By comparison, Redfin and Zillow Team produced $61 million and $424 million in operating money flow, respectively. That means equally organizations are far more financially rewarding than Compass.

The verdict

Investing in IPOs can be dangerous. In standard, I believe it is most effective to hold out a several quarters before earning the final decision to buy. That gives the market time to digest any news, and it presents buyers a prospect to master far more about the company. In some cases the community spotlight illuminates problems that were not evident prior to the IPO.

That being reported, Compass has a massive market possibility and a relatively solid aggressive situation. If you want to pick up a number of shares now, that ought to be high-quality. But hold out for extra information and facts ahead of setting up a more substantial position.

If Compass finishes up being a lengthy-time period winner, ready a handful of months will not likely be the conclusion of the globe. But if the IPO was mispriced or a little something else goes wrong, you could lose a large amount of cash by leaping in much too soon.

This short article signifies the view of the author, who may well disagree with the “official” recommendation posture of a Motley Idiot top quality advisory provider. We’re motley! Questioning an investing thesis — even 1 of our very own — can help us all feel critically about investing and make choices that enable us come to be smarter, happier, and richer.