Description

SUMMARY

COMP is a ~$1.7B market cap, VC-backed residential real estate (“resi”) brokerage firm. COMP was founded to disrupt the low-tech resi market, deploying significant capital into the development of a leading, end-to-end tech platform used by its fast-growing base of agents for existing home sales (“EHS”). Despite taking significant market share in less than a decade, COMP share have lost nearly two-thirds of their value since the beginning of 2022 in the wake of skyrocketing mortgage rates that deteriorated the resi market. COMP has since turned away from growth to profitability and has nearly completed executing on cost cuts of greater than one-third of its fixed cost base. As interest rates have declined in recent weeks and the market anticipates the Fed to further reduce rates in 2024, I expect that the resi market will rebound, and COMP is best-positioned to benefit. COMP currently trades for 0.25x 2025 consensus revenue, only slightly higher than multiples over the LTM period given resi market headwinds, but reversion of multiples applied to conservative fundamental assumptions should yield a share price of nearly $4.50 to over $5, or ~50% upside to today’s share price.

BUSINESS OVERVIEW

COMP is a NYC-HQ’ed, tech-enabled resi brokerage operating nationally with a focused presence in California and the tri-state area. COMP’s 28K (contractor) agents make EHS on its full-suite tech platform that provides tools, both for client management (CRM, marketing, client services, etc.) and decision-making (data, analytics, and AI/ML). COMP’s revenue is comprised mostly of the ~2.6% commission it takes on its agents’ transactions.  

SITUATION OVERVIEW

COMP was founded in late 2012 to disrupt a fragmented, low-tech resi brokerage market. COMP raised / invested $1.5B+ from Softbank and a who’s-who of VCs / SWFs over ~8.5 years to execute an aggressive growth strategy, which mostly worked: COMP recruited thousands of agents and carved out #1 spots in several core markets at high-20% market shares and, despite geographical focus, ~4.5% of the entire US resi market by Gross Transaction Value (“GTV”). At the time of its April 2021 IPO ($18/share), COMP had reached $150B+ GTV, $3.7B+ revenue, a $7B valuation; however, beginning in mid-2022 and in the 18 months since, COMP, and resi-exposed equities alike, has experienced a “rapidly deteriorating market”^([1]) and traded off nearly 90%. In response, COMP has committed to multiple savings initiatives, including ending to agent incentives and $500M+, or 35%+, OpEx savings, ~50% of which targets R&D. approximately two months ago, several peers lost class action suits that allege brokerages conspired to force sellers to pay buyers’ brokers, inflating commissions. Despite contagion risk causing near-term share declines, COMP has rebounded with a shift in macro and industry tailwinds (interest rates, EHS, etc.).

INVESTMENT THESIS

COMP shares bear significant macro and resi market risk/opportunity that inordinately impacts its valuation; this has become particularly clear since the mid-2022. As such, macro developments that either improve or stagnate/deteriorate the resi market essentially comprise COMP’s bull and bear case, respectively. Given recent rate declines and the expectation of the Fed cutting rates in 2024 (i.e., mortgages rates also decline + EHS up), COMP shares have seen some of the macro overhang lift. Moving forward, the law of large numbers and potential economic shifts from commissions lawsuits may hamper the likelihood of significant agent growth, specifically that COMP can regain ~20%+ principal agent growth (my base case assumes +3% only); still COMP remains best-in-class for career agents (vs. less-technologically advanced peers, many of which employ part-timers) given an edge in technology/services vis-à-vis agent retention, reportedly 90%+ for principal agents, and productivity comparables, given HSD transactions per agent vs. peers at MSD. COMP has generally maintained ~4.5% US GTV for years, and with a potential reversion to the mean in the broader market, COMP is positioned to benefit, this time with significant margin expansion opportunities via (1) a reduced fixed cost base and (2) the ending of agent incentives that should help improve gross margins. Further, COMP has ample ($570M) liquidity from its $220M cash balance and $350M facility (albeit floating at S+150) to the extent investment (incl. market penetration) opportunities arise.

VALUATION

Base Case: assumes some further moderation in interest rates, which will slightly improve EHS transaction velocity and affordability. If this occurs, I assume (1) COMP agents and transactions reach MSD growth, (2) GTV lags slightly on a moderation of the decline in EHS prices and (3) COMP hits OpEx guidance. Under this scenario, COMP will inflect FCF-positive in 2024 and get +0.1x expansion on its forward revenue multiple, reaching ~$4.30/share, ~35% upside to today’s share price.

Bear Case: assumes rates remain high, causing further deterioration in the resi market and at COMP: (1) lower productivity among fewer COMP agents (-3% Y/Y in 2025), mitigated slightly by (2) increased EHS prices and (3) COMP making further cuts to OpEx beyond current targets. Shares decline to ~$2.10, or ~35% downside.

Bull Case: assumes rates decline, resetting the resi market and driving (1) higher productivity among a growing base of COMP agents (+5% Y/Y by 2025), mitigated slightly by (2) decreased EHS prices and (3) COMP flexibility to continue R&D investments, driving OpEx slightly higher than COMP targets. Under this scenario, COMP will reach $200M+ in FCF by 2025, nearly doubling its revenue multiple (0.5x) and earning a premium multiple (7.0x) to peers on Adj. EBITDA as it reaches ~$6.30/share (96% upside).

RISKS

• Market conditions (Fed policy, in particular);
• Further deterioration in the resi market (EHS volumes and prices);
• Class action litigation;
• Maintenance of technological advantages;
• Competition among brokerages and for agents and other personnel;
• Investment curve of expansion into new markets; and
• Changes in fee structure or rates.

Catalyst

• Resumption of agent growth
• Improvements on share of brokerage fee
• Resi market reversion given macro/rate improvement