Is Compass Stock A Buy After Its IPO?

April Fool's Day (Thursday) wasn't a complete joke this year. The Compass stock ticker (COMP) went live on the New York Stock Exchange on April 1. It could see some big growth in the near future as the economy opens up and real estate prices keep climbing.

But the question of whether Compass stock is a buy for the long run is a different story.

First, the stock priced at $18, significantly lower than its initial range of $23 to $26 per share. It closed its first day of trading at $20.15 per share, but since then, it's back down within the $18 range.

Altogether, the IPO raised $450 million for Compass. That's on top of a $1.5 billion pile of money injected by capital investors over nearly a decade.

What makes this real estate stock any different from others? We'll tell you, and then we'll let you know whether it makes a good stock to buy.

What Is Compass Inc.?

Compass Inc. is a New York–based real estate company. You've heard of those before. But Compass claims to be different.

This young company was named mid-sized business of the year in 2015. It's backed by SoftBank, a company that invests in primarily futuristic tech stocks.

You might say Compass puts a more modern spin on its work. It's a real estate broker harnessing the full power of the Internet to help agents market properties.

In fact, it is the first company to offer a mobile app for real estate agents.

It also offers AI-powered customer relationship management, digital design, and collaboration tools to help these agents tackle every aspect of their work.

Realtors can interface with customers through Compass Collections, a visual workspace that gives both parties easy access to get pricing updates, look at comps, and much more.

Compass also offers insights on the realtor side, as well as a marketing design center to create custom ads and craft social media.

These products have managed to attract many realtors to work for them. Compass currently has more than 20,000 agents sharing 15% to 30% of their sales with the company.

The homes they focus on are significant to the company's value as well: This is an upscale real estate company. Luxury homes and hi-tech brokerage seemingly go hand in hand.

The strong business model has helped Compass to expand to major cities all over the country including Philadelphia, Boston, San Francisco, D.C., Los Angeles, and a few others.

In 2018, Compass was named to Crain's "Fast 50" list featuring the 50 fastest-growing companies in New York.

Agents invested $70 million in commissions to buy stock options through a program introduced in 2018. The company also set aside 1.75 million shares, or $31.5 million in Compass stock, for its agents.

Compass agents also had a shot at buying pre-IPO shares for $18 per share. Of course, soon it will be commonplace for retail traders to buy shares through brokerage apps, but this is still a great perk if you're an agent.

Is Compass Profitable?

We've seen all the great things Compass has done for its agents. Now, let's try to be a little more objective about how this company looks financially.

Compass is not profitable. It lost $270 million last year. Not unusual for a young company, but it means it still has a lot to prove.

COVID-19 was no help to the balance sheet, forcing Compass to lay off 15% of its staff last year.

On the flip side, Compass revenue has increased significantly in the last five years, from $186 million in 2016 to $3.7 billion in 2020. That's a 1,889% revenue increase in five years.

In the same time, the platform was growing in popularity, its users going from 27,000 in 2018 to 145,000 in 2020, a 437% increase.

Compass is also backed by big-time capital investors like SoftBank, Fidelity, Goldman Sachs, Wellington Management, and others, which is a good sign of investor confidence.

All of its recent growth, however, could have to do with the fact that it's still a young company. You can't expect these same numbers once Compass is established.

Here is the word on Compass for the long term.

Is Compass Stock a Buy?

The commercial real estate suffered over the course of the COVID-19 pandemic as people fled cities. The U.S. Post Office received more than double its monthly average of New York City mail-forwarding requests – 56,000 – in March 2020.

But at the end of the day, real estate never goes out of style. People may flee cities in the short term, but the land is ultimately scarce, and wherever more people flee, there will be an opportunity to develop or purchase commercial real estate.

Additionally, more and more people are getting vaccinated, raising hope for a potential mass return from rural getaways and into cities. Sure, some people may have left cities, but some were vacationing temporarily.

Remember, Compass works in a preferred real estate sector. So, while its portfolio definitely includes luxury New York condos and office spaces, it has plenty of upscale homes in rural areas – those very places where those fleeing cities want to getaway.

Meanwhile, although Compass has fired out the gate and it doesn't show many signs of slowing, you should consider how this company stacks up against other legacy real estate companies.

It has a long way to go before joining companies like CBRE, Zillow, and Simon Holdings, with $26 billion, $33 billion, and $38 billion market cap, respectively.

To stick around, Compass would really have to separate itself as a unique real estate company. Though, it's faced criticism of burning cash on top of a legacy real estate model, which is not a good look.

The Compass stock price did not even see the usual pre-IPO inflation, indicating the smart money might know something others don't.

That said, you are likely to get a pop from Compass stock as the economy opens this year. But whether it's a long-term hold is yet to be seen.

Disclaimer: Any performance results described herein are not based on actual trading of securities but are instead based on a hypothetical trading account which entered and exited the suggested ...

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