UPDATED, March 31, 2021, 3:48 p.m.: Compass has slashed the price of shares and reduced the size of its total stock offering ahead of its IPO.
In an updated S-1 filed with the U.S. Securities and Exchange Commission on Wednesday, Compass said it lowered its maximum share price to $19, a 26.9 percent drop from $26. The venture-backed brokerage is now offering 25 million shares, down from 36 million.
At the new price, Compass now seeks to go public at a valuation of just over $7 billion. That’s down from its initial target of $10 billion, and slightly higher than its last valuation of $6.4 billion, set by investors in July 2019.
“It’s not the premium you would expect, especially if you think about the growth of the business between 2019 and 2021,” said Nima Wedlake, a principal at Thomvest Ventures. (The company invests in real estate firms, but has not invested in Compass.) In its S-1, Compass said revenue jumped 56 percent to $3.7 billion in 2020, after doubling between 2018 and 2019.
For a company that’s relied heavily on investor capital, Compass is now poised to raise considerably less cash — some $475 million, down from nearly $1 billion.
Federal regulators approved Compass’ IPO on Monday, meaning it’s set to go public in the coming days. It will trade on the New York Stock Exchange under the ticker symbol “COMP.”
Compass’ IPO has been the subject of intense speculation for years. Since 2012, the residential brokerage has raised $1.5 billion from investors including SoftBank, and it’s used that money to aggressively gain market share.
The firm’s cumulative losses total $1 billion, according to the S-1, and critics have said it operates more like a traditional brokerage than a technology company. The IPO is a referendum on that narrative.
In a March 29 research note republished in Forbes, investment firm New Constructs argued that Compass is a traditional firm with “flashy marketing, whose only advantage is a virtually unlimited ability to burn cash.”
“SoftBank needs this IPO more than investors do,” wrote David Trainer, the firm’s founder.
Propping up the IPO?
In the updated filing, Compass said the family of co-founder and CEO Robert Reffkin, as well as key backers, could end up purchasing large blocks of shares representing nearly 40 percent of the total offering.
Underwriters also increased the percentage of shares set aside for agents to 7 percent of the offering, up from 5 percent. That’s equivalent to 1.75 million shares, or $33.225 million.
“It makes it easy for the investment bankers,” said Trainer. “They do that and lower the price? It means they’re getting some serious pushback. Not only can they sell all the shares but they can’t sell them at the high price.”
The Reffkin family indicated interest in purchasing about 973,600 shares, just under 4 percent of the total offering, for $18.5 million. SoftBank and hedge funder Robert Citrone have expressed interest in purchasing about 7.37 million shares, or 29 percent of the offering, for $140 million.
The shareholders’ interest plus the shares set aside for agents accounts for 10 million shares of the 25 million shares slated to be offered. None of the parties have entered into any binding agreements or commitments to purchase the shares, the filing notes.
Gauging investor demand
The last-minute change reflects investor pushback during Compass’ roadshow, sources said.
“They had to carve it back because it wasn’t working at the high number … The question is, are they even going to be able to get it done at the lower number?” Trainer said. “If they can’t get it done at a premium to the number on their books, maybe they don’t go public at all.”
However, Compass’ move may also reflect sentiment in the broader tech market. Investors have pulled back on high-growth tech stocks in recent weeks. The Nasdaq Composite dropped 0.1 percent Tuesday, and real estate stocks (including Redfin, Realogy and eXp World Holdings) are down between 9 percent and 40 percent from their peak in February. Zillow shares opened at $126 each on Wednesday, down 39 percent from a peak of $208 per share last month.
Compass’ S-1 sowed doubt, however, that it could be valued as a tech company.
One venture capital investor compared Compass to WeWork, which plans to go public in a $9 billion SPAC deal.
“Both of those companies are struggling with a similar thing: ‘Are we a tech company or a real estate company?’” the investor said. “Clearly, the public markets value real estate and tech companies very differently.”
UPDATE: This story has been updated to include market commentary.