Compass: A Renovated Business Model With An Attractive View

Core Viewpoint - Compass, Inc. is transitioning from a growth-focused strategy to one centered on profitability and cash flow, aiming for positive EBITDA and free cash flow in 2024 after facing significant challenges in the real estate market [3][4][7]. Company Overview - Compass, Inc. is a traditional real estate brokerage firm founded in 2012, investing over $1.5 billion in technology and data to enhance real estate transactions [1]. - The company has nearly 14,000 agents and a Gross Transaction Volume (GTV) close to $180 billion, making it the largest independent real estate brokerage by GTV, with a 4.6% market share in the U.S. and 30% in its top three MLS cities [1]. Market Context - The real estate market is highly cyclical, with transaction volumes expected to bottom out in 2024, leading to potential growth in 2025 [4][7]. - Residential transaction volume decreased by 3.5% year-over-year in Q1 2024, following declines of 19% in 2023 and 18% in 2022 [7]. Financial Performance - In 2023, Compass experienced a 15% decline in total transactions, outperforming the market's 19% decline [7]. - The company aims to generate positive free cash flow (FCF) in 2024, recovering from a FCF loss of $360 million in 2022, with cash burn reduced to $37 million in 2023 [7]. - Compass had approximately $165 million in cash and no debt at the end of Q1 2024, with expectations to maintain a strong balance sheet despite potential cash outflows for settlements and share repurchases [7]. Growth Potential - The company is projected to grow revenue by over 10% through the cycle, with earnings and FCF growth closer to 15% due to operating leverage [4]. - At the midpoint of the cycle in 2026/2027, Compass is expected to generate FCF per share of $0.30 to $0.40, with a valuation target of $6.00+ in three years based on historical market multiples [4]. IPO and Market Challenges - Compass went public in 2021 during favorable market conditions, but has since seen its stock decline approximately 80% from its IPO level due to changing market dynamics and rising interest rates [5][10]. - The company is considered one of the few legitimate public companies from the 2021 IPO class, despite the overall market contraction affecting newly public companies disproportionately [10].