While technologies such as artificial intelligence deliver several conveniences that we take for granted, certain sectors—such as real estate—remain largely stuck in the “analog” age. This is where Compass aims to spark a rethink in this age-old industry. Billed as an end-to-end platform for residential real estate agents, Compass drives multiple efficiencies for the 19,000 agents under its purview.
As the largest independent real estate brokerage by gross transaction value, Compass commands a 4% market share. Not surprisingly, its initial public offering (IPO) generated intense interest, although valuation concerns remain as the stock market settles.
When Did Compass IPO?
Compass IPOed on April 1, 2021 with 3 share classes. The IPO itself listed Class A shares, which have one vote per share, whereas Class B shares have no voting rights. Class C share ownership affords 20 votes per share.
Compass Financial History
Though the underlying AI technology that may disrupt the real estate industry compels, the main challenge for Compass involves its wild valuation. According to the company’s amended S-1 Prospectus, management sought a $10 billion valuation for its IPO. Compass will offer 36 million Class A shares in its IPO. Ultimately, shares debuted at $18.
Since 2012, Compass generated $300 billion in gross transaction volume. In 2020, it rang up $3.72 billion in revenue, a gain of 56% year-over-year. Also, Compass pared down its net losses last year to $270 million from $388 million in 2019.
Still, you must ask, is this valuation justified? Consider the case of Realogy (NYSE: RLGY). Though Compass’ marketing efforts are arguably superior, Realogy basically offers a similar solution — an integrated services provider that helps real estate agents become more productive.
The glaring fact, though, is that Realogy has strung together multiple profitable years and generated more revenue in 2020 ($6.2 billion) while sporting a market capitalization of less than $2 billion.
Compass Potential
The hype surrounding Compass leaves no doubt that investors are intrigued by Compass. Since 2012, Compass raised $1.5 billion over 10 private funding rounds. Notably, in 2018, lead investors Qatar Investment Authority and SoftBank Vision Fund helped raise $400 million in a Series F round.
Further, social media recently demonstrated the enormous power of the internet. Through sharing ideas across various forums, pumped-up stocks could enjoy tremendous sentiment. Certainly, the Compass IPO has the potential to tap into this synergy.
But concerns also abound for this upcoming debut. Beyond the valuation argument, Compass depends on the economy moving along in an upward trajectory. Also, to justify the valuation, the company needs interest rates to remain low to incentivize buyers to ignore the possibly overheated real estate market.
Unfortunately, evidence indicates that the economy is headed toward a deflationary environment. Key among the data is money velocity, or the rate that each unit of currency circulates in the economy. It’s near all-time lows, which means consumers are saving money, not spending it.
This is a huge economic red flag that you should not ignore. Private companies, and especially technology companies, are often at the mercy of the market, irrespective of their best intentions. Market participants should study carefully before investing in financial instruments that do not have a robust sample size from which to choose.
How to Buy Compass Stock
If you already know how to buy stocks, you can dig in right away. If you need more guidance, you can follow the steps below.
Step-by-step Guide:
- Pick a brokerage.
Most brokers now offer similar incentives for you to join, such as commission-free trading. Therefore, the decision largely comes down to lifestyle and where you see yourself as an investor. If you work a hectic schedule, a mobile trading app may be the most appropriate platform. But if you wish to develop your investing acumen, you should elect a full-spectrum service.
- Decide how many shares you want.
Deciding the number of shares to purchase is a personal factor, mostly boiling down to risk tolerance and account size.
Regardless of your decision, you should have your number established before you trade. This way, the market noise is less likely to distract you into making emotional transactions. - Choose your order type.
Before placing your order, you should familiarize yourself with these market concepts, especially order types.
• Bid: The bid is the maximum price a buyer will offer for a stock. It is always lower than the ask.
• Ask: The ask is the minimum price that a seller will take. It is always higher than the bid.
• Spread: The spread is the difference between the bid and ask price. It’s also a measure of market liquidity as it represents the risk-reward ratio for the market maker to perform his/her intermediary services between buyers and sellers. Narrower spreads indicate more liquidity while wider spreads indicate less liquidity (which characterize risky asset classes such as penny stocks).
• Limit order: Limit orders execute at a predetermined price, facilitating maximum control and transparency over your trades. The disadvantage is that no guarantee exists the stock will reach said price, potentially leaving your order hanging unfulfilled.
• Market order: Market orders execute at the next available price, which is useful if you want to guarantee yourself a position in the target stock. The drawback is that market orders fulfill at rates least favorable to you, as in buy orders at the ask price and sell orders on the bid.
• Stop-loss order: A stop-loss order automatically exits you out of your holdings at either a predetermined price or the next available price. While this protective function gives you peace of mind, if a new session opens at a much lower price than the previous session’s close (gap-down session), you could incur a much steeper-than-anticipated loss.
• Stop-limit order: Stop-limit orders only fulfill at the predetermined price, preventing the surprises associated with stop-loss orders. But like limit orders, you could potentially risk leaving your stop limit hanging unfulfilled. - Execute your trade.
To execute your trade, follow these steps for a market order:
• Select action type (buy or sell).
• Enter the shares you want to acquire (or sell).
• Hit the execute button.
Placing limit orders follows the same process above but you will need to include your desired execution price.
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An Intriguing Debut
Companies like Compass started bringing the real estate industry to the 21st century. Compass offers an end-to-end platform that helps real estate agents quickly and efficiently secure deals, organically assisting buyers and sellers for what is usually a stressful process. The business community is impressed with the firm, and as it obtains capital from investors, you can get in on the ground floor.
Because Compass enjoys serious backing, it has serious potential. However, you should realize that other competitors offer similar platforms for what might prove to be a more reasonable valuation.
About Joshua Enomoto
His distinct writing style of distilling convoluted data into relatable and compelling narratives has earned him recognition among several investment-related publications.