Compass, which applied for an IPO earlier this week, is expanding like a software startup while maintaining the bones of a conventional real estate brokerage business. It would all come down to place before determining its worth.
Former Goldman Sachs executive Robert Reffkin co-founded the SoftBank-backed firm in 2012 with the aim of luring top agents to the ranks with a stronger technology network. The pitch: Only Compass realtors have access to exclusive tech resources for scheduling meetings, creating marketing material, scheduling interactive tours, and hosting livestream open houses. In this way, Compass is similar to Zillow or Redfin, two companies that have used the internet to disrupt the conventional brokerage industry.
Yet, with 19,000 brokers and offices in high-priced cities like San Francisco and Chicago, the heart of Compass’ industry seems much like Realogy, the parent company of Sotheby’s and Corcoran. Compass spent more than 80% of its $3.7 billion in sales last year on fees and other bonuses such as stock-based rewards, despite revenue growing 56 percent year over year to $3.7 billion.
The remainder was eaten up by such costs such as promotion and research and growth, culminating in a $270 million net loss. It is not uncommon to see anything like this. Companies are competing for agents, and Realogy posted a $600 million net loss last year, owing in part to its commission cost.
Realogy’s sales increased at a far slower pace than Compass’s last year, increasing just 6%. But it seems unreasonable to value Compass as a conventional broker with an enterprise value-to-sales multiple of 1. Compass will be worth $37 billion if valued at a higher ratio than Zillow, which is 10 times the last 12 months revenue. According to Bloomberg, this will render it almost six times more profitable than it was in 2019, when it last raised funds.
There are issues regarding this as well. Zillow is less reliant on real estate agents. It has made money in the last few years. It has also rendered the home-buying quest and negotiating phase more open, potentially ushering in a long-term shift in the industry. Compass, on the other hand, has a technology infrastructure which may pivot as well. It is worth more than it was in 2019. Still at 2.5 times revenue, it is worth more than it was in 2019. Compass might be worth $26 billion if it is valued at the midpoint of both sides, assume 6 times revenue. While Compass is maybe not the best option, it is the best place to be in the real estate universe.