Compass (COMP)

Real estate technology company Compass (NYSE:COMP) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 28.7% year on year to $1.36 billion. Next quarter’s revenue guidance of $2.08 billion underwhelmed, coming in 1.5% below analysts’ estimates. Its non-GAAP loss of $0.09 per share was significantly below analysts’ consensus estimates.

Company Overview

Fueled by its mission to replace the "paper-driven, antiquated workflow" of buying a house, Compass (NYSE:COMP) is a digital-first company operating a residential real estate brokerage in the United States.

Technology has been a double-edged sword in real estate services. On the one hand, internet listings are effective at disseminating information far and wide, casting a wide net for buyers and sellers to increase the chances of transactions. On the other hand, digitization in the real estate market could potentially disintermediate key players like agents who use information asymmetries to their advantage.

Compass's primary competitors include Zillow (NASDAQ:ZG), Redfin (NASDAQ:RDFN), and eXp World (NASDAQ:EXPI).

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Compass’s sales grew at a decent 17.4% compounded annual growth rate over the last five years. Its growth was slightly above the average consumer discretionary company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or trend. Compass’s recent performance shows its demand has slowed as its annualized revenue growth of 3.1% over the last two years was below its five-year trend.

We can dig further into the company’s revenue dynamics by analyzing its number of transactions, which reached 49,121 in the latest quarter. Over the last two years, Compass’s transactions averaged 6.4% year-on-year growth. Because this number is higher than its revenue growth during the same period, we can see the company’s monetization has fallen.

This quarter, Compass generated an excellent 28.7% year-on-year revenue growth rate, but its $1.36 billion of revenue fell short of Wall Street’s high expectations. Company management is currently guiding for a 22% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 23.2% over the next 12 months, an improvement versus the last two years. This projection is commendable and indicates its newer products and services will fuel better top-line performance.

Compass’s operating margin has been trending up over the last 12 months, but it still averaged negative 3.4% over the last two years. This is due to its large expense base and inefficient cost structure.

In Q1, Compass generated a negative 4% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Compass’s full-year EPS flipped from negative to positive over the last five years. This is encouraging and shows it’s at a critical moment in its life.

In Q1, Compass reported EPS at negative $0.09, in line with the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Compass to perform poorly. Analysts forecast its full-year EPS of $0.08 will hit $0.44.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Compass has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, lousy for a consumer discretionary business.

Compass’s free cash flow clocked in at $19.5 million in Q1, equivalent to a 1.4% margin. This cash profitability was in line with the comparable period last year and its two-year average.

Compass reported $127 million of cash and $556.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $161.7 million of EBITDA over the last 12 months, we view Compass’s 2.7× net-debt-to-EBITDA ratio as safe. We also see its $2.1 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We struggled to find many positives in these results. Its number of transactions missed and its revenue fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock remained flat at $7.73 immediately following the results.

Updated: May 19, 2025 at 10:05 PM EDT

Before making an investment decision, investors should account for Compass’s business fundamentals and valuation in addition to what happened in the latest quarter.

Compass isn’t a terrible business, but it doesn’t pass our bar. Although its revenue growth was good over the last five years and is expected to accelerate over the next 12 months, its operating margins reveal poor profitability compared to other consumer discretionary companies. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its low free cash flow margins give it little breathing room.

Compass’s P/E ratio based on the next 12 months is 14.3x. Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're pretty confident there are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $9.06 on the company (compared to the current share price of $6.25).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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