Real Estate brokerage Compass, Inc. (COMP - Get Rating), which is backed by SoftBank Group, made its stock market debut on March 31, with a pre-IPO valuation of $9 billion. The company raised $450 million through a public offering of 25 million shares, priced at $18 per share, which was the lower end of  its price range for an offering downsized from its original 36 million shares at $23 – $26. The stock has declined 10.5% since the offering. COMP had previously raised $1.50 billion from SoftBank Group.

COMP disclosed in its IPO filing that it was involved in residential real estate transactions valued at $152 billion last year, accounting for 4% of the United States housing market. The company’s revenues have increased 56% year-over-year to $3.70 billion in 2020, with more than 19,000 agents using the platform.

Despite being a relatively new player in the technology-backed real estate market, the company has substantial growth potential. However, COMP’s downsized IPO indicates reduced investor interest in  tech-based housing market platforms because  the housing market’s growth is currently  decelerating. 

Here’s what could shape COMP’s performance in the near term:

Housing Market Outlook

Thanks to remote working and near-zero interest rates, the housing market overheated over the past year, with demand outpacing supply. This has resulted in lean inventory margins across the country, combined with a significant uptick in house prices. According to CoreLogic, median housing prices  increased 10.4% year-over-year in February 2021, the highest jump since 2006. Redfin Market Insights reported that approximately 42% of the houses have been sold at more than their listing prices since early April.

However, the inventory margins have begun recovering since March, as home builders are now constructing more residential buildings  amid the surging demand. But despite rising supply, housing prices are expected to remain high in the near future because  the cost of raw materials and inflation are on the rise. Increasing lumber prices, among other factors, are hiking  median house pieces by at least $24,000. Though continued near-zero interest rates have led to a decline in mortgage rates over the past two weeks, the overall cost of houses is rising. The consumer price index was  2.6% in March, up 60 basis points from February. This has also contributed to rising prices in the housing sector.

Given this backdrop, the housing market is poised for a correction soon because the industry’s growth is expected to be unstable. Also, with the recovery from the pandemic improving each day, and many companies contemplating a return to in-office work models, the housing market could  witness a  decline in demand.               

Mixed Profitability and Growth Story

COMP’s trailing-12-month gross profit margin of 94.27% is 43% higher than the industry average  65.91%. The company’s asset turnover ratio of 2.62% is significantly higher than the industry average  0.12%. However, COMP’s trailing-12-month levered free cash flow margin and return on sales came in at negative 0.21% and 7.26%, respectively. Its ROTC and ROA margins are negative also. .

COMP’s revenues have increased 55.9% year-over-year. However, the company’s EBITDA and EPS have declined 44.2% and 32.5%, respectively, from the same period last year.

Consensus Price Target Indicates Potential Upside

Analysts expect COMP stock to hit $19 soon, indicating a 5.4% potential upside.

POWR Ratings Reflect Uncertainty

COMP has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

COMP has a grade of C for Growth, and D for Quality. These are justified, given the company’s financial performance over the past year and negative profit margins.

Of the 119 stocks in the D-rated Software – Application industry, COMP is ranked #78. In addition to the grades I’ve highlighted, you can check out additional COMP Ratings for Value, Momentum, Stability, and Sentiment here.

Click here to view the top-rated stocks in the Technology – Application industry.

Click here to check out our Software Industry Report for 2021

Bottom Line

A potential pullback in the housing market along with the recent tech-sell off  caused COMP’s IPO to be downsized. Given  surging market volatility and potential industry headwinds, we think it is best to wait until the housing market stabilizes before investing in the stock. 

COMP shares were trading at $17.50 per share on Monday morning, down $0.53 (-2.94%). Year-to-date, COMP has declined -13.15%, versus a 11.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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