Compass’ lockup period ends Tuesday, doubling tradable shares

Market reaction to surging supply will show investors’ confidence in the business model

Robert Citrone, Co-Founder of Discovery Capital Management; Masayoshi Son, CEO of SoftBank; Robert Reffkin, CEO of Compass; Ori Allon, Founder & Executive Chairman of Compass (Getty Images)
Robert Citrone, Co-Founder of Discovery Capital Management; Masayoshi Son, CEO of SoftBank; Robert Reffkin, CEO of Compass; Ori Allon, Founder & Executive Chairman of Compass (Getty Images)

About 200 million shares of Compass could hit the market on Tuesday when restrictions from the brokerage’s initial public offering lift.

The end of the 180-day lockup period, which prevented Compass’ largest shareholders, directors and officers from selling their holdings, means the companies’ float — shares that can be traded — will more than double.

What happens when all of those shares become tradable tomorrow will depend on the patience of investors and their views of Compass’ business model. The company has been both praised and criticized for its rapid growth, fueled by acquisitions and aggressive recruiting of top agents from competing firms.

“It’s an indication of how much faith they have in the business,” said David Trainer of New Constructs. Trainer’s investment research firm rates the stock “unattractive,’’ the equivalent of “sell,” citing the company’s spending and a failure to “create lasting competitive advantages.”

Certain investors who bought at the pre-IPO price of $18 a share are subject to the lockup. At Monday’s close of $13.54, those shares were down about 25 percent. Investors who bought at the starting price of $20.15 at its April 1 debut on the New York Stock Exchange are down about 33 percent.

Compass insiders subject to the lockup include major shareholders and venture capital investors that contributed to $1.5 billion in pre-IPO funding since the company’s 2012 inception. Compass’ board of directors, founders, CEO Robert Reffkin and executive chairman Ori Allon, and other key executives’ holdings were also subject to the six-month lock-up.

Analysts are split on Compass’ long-term prospects, though most expect the shares to decline when the lockup lifts, at least at first.

New Constructs shorted Compass from its initial public offering until late August and said the short position outperformed expectations by 36 percent. During that period, Compass’ share price dropped 24 percent compared with the S&P 500’s 11 percent gain.

Jason Helfstein at Oppenheimer has given the brokerage an “outperform” rating with a target price for Compass shares of $25. Helfstein said he expects Compass to repeat the pattern that generally plays out when insiders are able to begin trading their IPO holdings: share prices tumble as the lock-up period ends and then subsequently rally.

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In July, after Compass’ shares had fallen about 39 percent from their debut, Helfstein said the brokerage stock’s lack of liquidity was the biggest factor keeping investors away, not its business. If that was the case, that problem may be solved by the end of the lockup.

The elephant in the room is Softbank, which owns 33.5 percent of Compass, and hasn’t indicated its plans.

“Softbank owns a third of the company so the question is what do they do now?” said Helfstein.

In July, Softbank, among the world’s biggest tech investors, sold 45 million shares in Uber worth about $2.1 billion in a block trade through Goldman Sachs. Last month, the firm sold 11.4 million shares worth about $2.2 billion of Doordash again via a block trade handled by Goldman Sachs, Bloomberg reported. The recent selloff came after Softbank’s investment in Chinese rideshare company Didi Global tanked. The company’s shares dropped about 43 percent from its IPO after Chinese regulators banned it from the country’s app store pending a security review for alleged violations in handling personal data.

Softbank owns more than 132 million Compass shares, according to Yahoo Finance. The second largest holder is Discovery Capital Management, with 33.6 million shares or almost 9 percent of the company.

Other investors that backed Compass in its fundraising efforts pre-IPO are also subject to lock-up agreements, according to disclosures. Those investors include Institutional Venture Partners, which also backs Coinbase and Robinhood, and has a 3 percent stake in Compass. Wellington Management Company is holding 10.6 million shares, or 2.69 percent of the firm, while Winslow Capital Management’s 7.8 million shares and Joshua Kushner’s Thrive Capital’s holdings of 7 million are just shy of 2 percent.

Fidelity Investments, which led a $100 million funding round for Compass in 2017, is holding about 6 million shares representing 1.5 percent of the brokerage. The Canada Pension Plan Investment Board owns 3 million shares and hedge funds Zimmer Partners and Alta Park Capital own about 2.3 million shares a piece.

The brokerage’s lock-up period could have been shorter if its share price had risen 25 percent for five of 10 consecutive trading days compared with its initial offering price of $18. That would mean Compass shares would have had to trade for around $22.50 for at least five days within a 10 day period, which never happened.

Investors are short 4.64 million shares as of August 31, accounting for 2 percent of the traded float and 1.18 percent of all outstanding shares. That’s down from short interest of 6.37 million shares as of the close on July 7.

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