Just listed: A recap of Compass’ IPO

Brokerage began trading at noon and hit a market value of $7.77B

National /
Apr.April 02, 2021 08:00 AM
(Instagram via laurenwoods.sellshomes, thefirm_eventdesign, tonywsimone, stevenabusch, ania_ishizaki, antonia_nycrealestate)
(Instagram via laurenwoods.sellshomes, thefirm_eventdesign, tonywsimone, stevenabusch, ania_ishizaki, antonia_nycrealestate)

Compass’ first day as a publicly traded company is in the books. The result so far? Neither a rousing success nor an epic failure.

After a tumultuous 36 hours, in which the residential brokerage reduced the size and price of its offering, the stock price hovered between $18 and $22 per share throughout the trading day. Compass’ stock closed at $20.15 per share, giving the company a market cap of $7.7 billion. Including employee options and restricted stock units, the company says its valuation is closer to $10 billion.

But by almost any metric, Compass’ IPO was not the home run company executives hoped for. The public offering raised $450 million — less than half the firm’s original target.

“Retail investors weren’t necessarily champing at the bit,” said Paul Levine, a partner at Sapphire Ventures, a real estate tech investor which does not hold a stake in Compass. He said the middling results were likely a function of a weaker IPO market – several tech firms have delayed IPOs in recent days – a drop in tech stock performance and company-specific concerns.

“Is the company an innovative tech company or more of a high-growth, traditional brokerage?” Levine said. “Where the IPO landed, my sense is that investors, at least today, are thinking it’s a rapidly growing but basically traditional brokerage.”

Spin room

Compass investors, however, had a cheerier take.

“I don’t know what was going on behind the scenes there,” said Ryan Freedman of Alpaca VC, weighing in on Compass’ last-minute decision to reduce both the share price and number of shares offered. (Alpaca, previously Corigin Ventures, invested in Compass’ seed and Series A rounds.)

“It feels like they wanted to price themselves on the conservative side, and the market is rewarding them for it,” he said. Freedman described the state of the public markets as “funny” and speculated that Compass executives and bankers were motivated by a desire to go public before the markets deteriorated further.

He described the firm as occupying a place between tech and brokerage.

“The reality is there’s a tech platform there that’s enabling these agents to be more effective with their time and business,” he said. “I do also think that there’s a lot of cards that they could turn over in the short- or medium-term.”

Speaking on CNBC, Compass CEO Robert Reffkin said the firm would “earn a higher valuation over time.”

“The way we’re going to earn that is by creating value for agents,” he added. “Compass is building the modern, one-stop shop to help them grow their business.” In a separate appearance, on CNN, Reffkin said that “the goal was never a valuation, the goal was successful financing, and this met that goal.”

During a later CNBC segment, Jeff Housenbold, who sits on Compass’ board through his position at its largest investor, SoftBank, claimed Compass helps agents increase their business by 19 percent. (The statistic cannot be independently verified.)

“Think about it as Shopify for small business owners,” he said. “They happen to be real estate agents.”

Analysts have doubts

Ahead of Compass’ IPO, though, analysts voiced doubts about Compass’ finances.

Although revenue jumped 56 percent to $3.7 billion last year, and more than doubled between 2018 and 2019, Compass has burned through more than $1 billion raised from investors. The overwhelming chunk of that revenue, like with other brokerages, is passed on to agents: According to its S-1, Compass’ average agent split was 82 percent in 2020, compared to 79 percent in 2018.

“We may not achieve or sustain profitability,” Compass said in its S-1 prospectus, filed with the SEC.

In a March 29 research note, New Constructs’ David Trainer argued that Compass is a traditional brokerage firm with “flashy marketing, whose only advantage is a virtually unlimited ability to burn cash.”

“The fundamental question, however, remains as to whether the Compass platform leads to improvements in agent productivity,” wrote Thomvest Ventures’ Nima Wedlake in a blog post on Compass’ offering. (Thomvest invests in proptech but is not a Compass investor.)

In an interview with The Real Deal, Wedlake said the valuation was not the premium one might expect, “especially if you think about the growth of the business between 2019 and 2021.”

#agentsofcompass

On social media, Compass agents were exuberant.

Some posted photos of themselves sipping champagne. Many promised it was “just the beginning.” At least one posted a drawing of a snorting bull.

Leonard Steinberg, the firm’s chief evangelist, former president and one of its earliest big-name hires, posted a photo of himself in front of the exchange and called the IPO an “exciting milestone.”

Vickey Barron, an agent in New York City, recounted a meeting with Reffkin in which he laid out his vision for Compass. “Not only was he passionate but it was clear that he knew his ‘Why’ and that nothing was going to stop him,” she wrote.

And Greg Mire, another New York agent, recalled his biggest concern about joining Compass being its brand recognition.

“Doesn’t seem to be an issue anymore,” he joked.






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