Less than three months after going public amid a wave of investor optimism about housing markets and enthusiasm for real estate technology, Compass shares have dropped almost 30 percent.
Compass, the second-biggest residential brokerage in the U.S., closed at $14.35 a share in New York trading Thursday, up 34 cents for the day, but down 29% from its debut price of $20.15 on April 1. It sold at its initial public offering at $18 a share.
The company’s rapid growth has come at too high of a cost, said David Trainer, CEO of research firm New Constructs.
“Payment for market share is not sustainable,’’ he said. “They can’t overpay agents forever.”
Wall Street has been largely enthusiastic about real estate tech, and analysts have about an equal mix of buy and hold recommendations on Compass. Those with buy ratings on the stock include Morgan Stanley, Oppenheimer, Deutsche Bank and Goldman Sachs. Morgan Stanley and Goldman Sachs were lead underwriters on Compass’s IPO.
Trainer’s firm, New Constructs, rates the stock “unattractive,’’ the equivalent of “sell.’’ The firm released a research note in late March arguing that Compass is a traditional brokerage with technology offerings no different from what other brokerages have developed or white-labeled for their agents. The analysis was published by Forbes.
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He pointed to other brokerages, such as eXp World Holdings, which was up nearly 25 percent year-to-date at Wednesday’s close. Redfin was down 10 percent, while Realogy, the country’s biggest residential brokerage, had gained 32.5 percent. Douglas Elliman’s parent company Vector Group, which also includes a tobacco business, was up 17 percent.
Compass’s decline has made the shares attractive, according to SeekingAlpha contributor Gary Alexander.
“Compass shares have steadily lost value – to a point that I think is now heavily buyable,” he wrote in a post published Tuesday. Alexander said in the post that he owns Compass shares.
Though Compass’s first public quarter revenue was up 80 percent year-over-year, its expenses ballooned 72 percent. Compass lost $212 million in the quarter.
Most of Compass’s expenses were attributed to paying out agent commissions and related expenses such as its stock-based Agent Equity compensation program and fees for client referrals. The firm also has acquired a real estate transaction management platform called Glide Labs and Boca Raton-based brokerage BEX Realty.
A Compass spokesperson said that Compass’s decline in share value is on par with its peers.
“Real estate tech stocks are down around 40 percent since their peak earlier this year,” according to a spokesperson, who said the company’s analysis is based on a timeline beginning in mid-February, when Zillow was trading at close to $200 per share. The person declined to provide a full list of companies it considered in its calculation.
An analysis by The Real Deal of 10 comparable public real estate companies shows an average year-to-date return of nearly 1.5 percent.
Compass’s market cap is currently $5.5 billion. The firm was valued at $6.4 billion during its last funding round and was aiming for a valuation of just over $7 billion on the eve of its initial public offering, which was itself an adjustment from its initial target of $10 billion.
EXp has a similar market cap of $5.69 billion, while Redfin’s market cap is $6.5 billion. Realogy and Vector both have market caps of about $2 billion.
Trainer admitted that Compass could always rally, but he maintained his view that the firm isn’t differentiated from its competitors “except that it loses more money than its peers.”
Compass reported a total loss of $1.1 billion at the end of 2020.
Corrects earlier version of story to show in second paragraph that $18 a share was the IPO price and the stock debuted at $20.15 in its first day of trading.