Investors don’t want to touch the compass (NYSE:COMP) Now it’s easy to understand why.It’s a growth stock that is currently losing money and it’s one of the worst places to be inside Unstable 2022 market. On top of that, it’s a real estate company, and with rising interest rates and tight inventories, all the signs probably indicate a slowdown in trading volumes starting later this year.
But as always, the market is taking a very short-sighted approach to this stock. When stepping back from the short-term turmoil of the compass, I still see a company that has soared to the top of the US real estate market within a relatively short few years. Redfin (Redfin (Redfin) has become a popular brand name for both homebuyers and sellers.RDFN).
So far, Compass shares have lost 40% of their value. Shares have fallen by more than two-thirds against the $ 17 high that Compass recorded last August.
Review of the compass bullish dissertation
Given the sharp drop in compass inventory over the past few months, we are upgrading our view of inventory as follows, despite continued basic performance. Strong buy. Investors like me are encouraged to double this dip. The compass can become unstable months in the future due to the potential slowdown in real estate activity (although I argue that this fear is already embedded in stock prices), but that’s okay- We are in a position to be a long-term winner.
Here’s a complete summary of why you’re bullish on Compass:
- Within a few years, the compass became the dominant intermediary. The market share of compass in US real estate transactions is growing rapidly to about 6%. The compass is already deeply integrated into major coastal markets and has recently promoted new office opportunities in the Midwest. There is still room for further expansion. Even after this year’s new market activity, compasses still permeate less than half of the US population.
- Third-tier revenue opportunities. Recently, Compass has opened the door to new monetization opportunities, such as launching its own title company. This positioning helps the compass draw more stock of wallet from the entire real estate transaction. Compass commented that the connectivity rate for these tertiary services is rising. Compass estimates that the US TAM is $ 240 billion, of which only $ 95 billion, the rest from adjacent services.
- Strong branding. Compass has built its brand around full-service, high-quality real estate agents. The style and profile are very similar to competitors such as Berkshire Hathaway Home Services and Sotheby’s. This gives the company a very strong differentiator from other tech-first rivals like Redfin.
- A scalable platform. The main costs of Compass are R & D costs to provide a technology platform for Compass agents and sales and marketing costs to promote the brand to homebuyers / sellers and potential new agents. These costs are scalable. As Compass grows in size and agent productivity increases (the average Compass agent sales increase by 19% in the second year), Compass will be able to improve its profitability margin. The latest results.
Compass also led a “break-even” adjustment EBITDA this year with a $ 7.6-8 billion revenue profile (which was flat until last year when the company generated $ 2 million adjustment EBITDA), and by 2025 the company will Aims to generate adjusted EBITDA of $ 1.2 billion. In the next section, we’ll look at the math behind this.
Meanwhile, the current stock price is close to $ 5, and the compass is trading at a market capitalization of only $ 2.33 billion. After offsetting $ 475.9 million in cash on Compass’s latest balance sheet, the company The corporate value is $ 1.85 billion. This means that the compass is trading at a fraction of this year’s expected earnings, less than twice the 2025 target adjustment EBITDA.
There is a big opportunity here. Don’t miss a chance while the whole market is facing the opposite direction.
The road to profitability lies in adjacent services
One of the biggest criticisms of investors against Compass is that the company has effectively acquired growth. Indeed, this is partly true. Compass gained market share very quickly by taking the approach of acquiring an existing brokerage firm and hitting the compass logo. However, Compass argues to defend this strategy by increasing agent productivity over time (especially when agents are onboarded on the Compass platform and brand) and over time acquisitions. The profit is lost.
In 2021, the company achieved a break-even adjusted EBITDA margin. By 2025, the company aims to expand its revenue base by up to 50% to approximately $ 12 billion and generate an adjusted EBITDA margin of up to 10% on its revenue.
As you can see from the graph above, most of this adjusted EBITDA expansion (450bps) is expected to grow from flat to a margin of about 10%, resulting in better trading economics. Of particular importance to Compass’ future strategy is the expansion of adjacent services. In other words, it provides title, escrow, and mortgage services to the buy side of the transaction.
The chart below shows the increments for these offerings. With titles and escrow alone, Compass’s net revenue per transaction almost doubles, and mortgage offerings through the company’s new OriginPoint subsidiary can offer significantly more.
Please note that these are relatively new products. OriginPoint launched its first mortgage in the fourth quarter. And in May, Compass acquired a title company called Consumer’s Title Company of California, which is licensed in all counties of California. Currently, title and escrow services are used only in the mid-single digits of Compass’s buy-side transactions, demonstrating a great opportunity for the company to continue cross-selling this product with agents.
Growth is still strong
And despite concerns about a short-term housing market collapse, Compass’s performance hasn’t deteriorated yet.
of Q1Compass steadily increased profits 26% pace from the previous year To $ 1.4 billion, the company’s first-quarter record. The graph below also shows that Compass closed its US real estate market share in the last 12 months at 5.8% in the first quarter, up 150bps year-on-year. In the first quarter alone, the compass market share was even higher at 6.1%, up 90bps from 5.2% in the first quarter of the previous year.
Agent productivity also remains incredibly high. Not only is Compass growing by simply adding agents to the network, but those agents are producing far more agents than the industry average. As shown in the graph below, the average Compass agent has generated a total transaction value of $ 10.6 million over the last 12 months. 3.5 times or more Than a typical agent in the industry.
Compass CFO Kristen Ankerbrandt gives some useful anecdotal commentary in her prepared remarks on how the real estate market looks for the rest of the year. .. First quarter financial results announcement:
The first six weeks of the second quarter have brought tough times in all industries. Due to these headwinds and inventory constraints, the start of the second quarter was slower than expected. As a result, the second quarter earnings outlook was affected, as shown in the second quarter guidance.
However, despite the uncertainty of the current macro environment, market growth is expected in 2022 as a result of strong ongoing demand and historically low inventories pushing up prices. House prices need to reverse the current uptrend and fall dramatically in order to turn market growth negative. This is unlikely to happen, especially if market prices continue to rise.
I continue to focus on long-term opportunities for Compass to continue to gain market share and drive significant margin expansion through agent productivity and cross-selling of adjacent services. The fragmented and localized real estate industry is heading towards national integration, and the compass has emerged as a major national brand. Stay here for a long time and buy a dip.