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Compass IPO Pricing Shows Win for SoftBank

Another hot real estate stock gets ready to go public.
(Tada Images)
(Tada Images)
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Real estate brokerage firm Compass has announced its IPO pricing, The Information reports.

Numbers To Consider:

  1. Compass intends to price its shares between $23 and $26 for an IPO, which would amount to a $10 billion valuation.
  2. SoftBank’s Vision Fund has put in around $1 billion over the past few years and is now worth more than $3 billion.
  3. Compass last had a valuation of $6.5 billion in 2019, according to PitchBook.

Why It Matters: Compass’ pricing is a bet on the continued demand for real estate stocks. Tech firms such as Opendoor, Redfin and Zillow have seen notable gains, outperforming the market of late.

The Takeaway: Compass posted impressive revenue growth in 2020, with an even bigger boost in the “second half as low-interest rates buoyed the housing market.”

  • Profitability is still a long way off. Compass had a net loss of $270 million in 2020.

Justin Oh:

From Morning Cents March 2, 2021:

If we assume they continue this growth into 2021 and improve to a 10% Gross Margin profile, a $10 billion valuation would represent 17x forward Gross Profit. 

But given this is NOT a sticky recurring software business with high profit flow throughs, along with the fact that there are headwinds for the entire real estate brokerage industry, Compass’ IPO doesn’t seem particularly compelling compared to other opportunities in this valuation range.

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