When I saw the headline of Motley Fool taking a deep dive on Compass, I really expected Jason Moser and Matt Frankel to get it wrong – most of Wall Street does. Normally, Motley Fool gets it right – beating the stock market by 4x.
They threw me off by talking about Compass as a software company. We all know that Compass is investing more in software today than any other brokerage in the world (including Zillow) – but that does not mean that they are a software company. They are a company that invests heavily in software development and they have amazing people crafting that software, but the heart of Compass is the same as Berkshire Hathaway, Realogy Brokerage Group and Howard Hanna – they are a real estate brokerage with a lot of agents.
What Jason and Matt did get right is that Compass is far bigger than Redfin or all iBuyers combined. Compass has 6% market share in the US and they only operate in about 50% of the markets. Redfin has 1% and is nationwide. iBuyers are at 1% and are not even close to 50% of the markets. What Motley Fool missed is the massive referral revenue that iBuyers get on seller lead generation. I believe that is going to drive margin much faster than flipping properties.
Where Compass gets interesting is in their title and mortgage business. It seems like Compass announces another title company acquisition every week, and their partnership with Guaranteed Rate – a mortgage company – gives them the full-service capacity. Few brokerages outside of firms like The Realty Alliance have done this. I am expecting Compass to make a significant move in insurance soon. Wall Street and Motley Fool have not really factored in the multiple on revenue for these home services companies that will create a durable long term value for the firm.
Another thing that Jason and Matt got right was Compass’ growth. Everyone knows that brokerages are all having a ton of success right now, but Compass’ growth is 4X the industry average. However, they missed the reasons why.
Compass is growing because they try to hire the best agents in the markets they serve at any cost. They know that high quality agents coupled with high quality systems and home services is the key to success. The review did not even mention Compass Concierge – a program that fixes up a home before they list it. Concierge is proving to drive top market prices repeatedly. Not only do homebuyers see the difference, but appraisers see it too.
At one point in the interview, Matt talks about a home that he listed which sold in a day; the agent got $24k in commission and sold it to a buyer that he already had. He feels that he should have paid less in commission. What Matt does not understand is that companies that have listings and have buyers, also have more valuable services – not less. Perhaps many consumers think this way. I have always said that the #1 reason for brokers to offer Buyside is because on a listing presentation, the agent talks about the qualified buyers that they already have for the home. “Sign here, press hard, and we will have this home sold quickly. Sure, we will market the property like other firms too. But we already have a head start.”
The last comment that I will make is one that Matt got right. It surprised me. Compass is operating at a high scale. Moreover, unlike Keller Williams, RE/MAX, and a pile of other brands, their technology works for their agents and is embraced by them. They have done the heavy lifting of building a data company with lots of applications that all talk to each other. This is really hard work. Realogy is getting there with MoxiWorks, but it takes a lot of time. The top The Realty Alliance and Leading RE firms are there.
The biggest issue for Compass today is the balance between growth and profitability. Clearly, Compass is focused on growth today, clocking in at 140% over the past year. Not bad. But someday profits are what the market will prefer.
Check out the video of the Motley Fool Deep Dive on Compass, below.
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