Is Compass no longer valued as a technology company?

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A few weeks ago, Compass announced its latest funding round: $370 million at a $6.4 billion valuation, bringing its total funding to over $1.5 billion. This provides new answers to a familiar question: Is Compass being valued as a tech company or a traditional brokerage?

Turning dollars into agents

The chart below shows Compass' recent funding rounds and its growing agent count. As I said during my recent Inman Connect presentation, "Compass is turning dollars into agents."

 
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During Compass' recent funding announcement, it stated that revenue is 250 percent in the second quarter compared to Q2 2018 (or up 150 percent). The highlighted columns represent those two time periods. Compass' agent count in August 2018 was around 4,500, compared to 13,000 in August of 2019. Overall agent count is up 190 percent while revenue is up 150 percent.

Using that growth figure for the full year, which is generous but fair, Compass' 2019 revenue would be around $2.25 billion. A $6.4 billion valuation would imply a revenue multiple of 2.8x -- a significant drop from previous years. While agent count is up 190 percent and revenue is up 150 percent, valuation is up only 45 percent.

 
 

Tech company or brokerage valuation

One of the key questions I explored in my deep dive analysis of Compass is whether it is being valued as a technology company or a brokerage. At the time, it was clearly being valued as a technology company, with a revenue multiple of 4.9x -- well above traditional brokerages and much closer aligned to Zillow.

 
 

The updated chart below shows revenue multiples based on projected 2019 revenues and stock prices as of July 1, 2019. Zillow still leads the pack, while Compass is on the leading edge of the next rung of traditional and tech-enabled brokerages. On a revenue multiple basis — and compared to 2018 — Compass is being valued less as a technology company and more as a traditional or tech-enabled brokerage.

 
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(Revenue multiples are just one way to benchmark company valuations. Even using other methods, such as a gross margin multiple, the story is the same: When using the same valuation methodology, Compass' valuation multiple is significantly lower than it was last year.)

Slowing growth?

Revenue multiples are generally based on future growth rates. One could argue that as Compass gets larger and its growth rate slows, its revenue multiple will naturally fall. However, Compass' growth in 2019 appears to be the same as it was in 2018: 150 percent. Compass' lower revenue multiple does not appear to be tied to a slowing growth rate.

 
 

Compass continues its impressive growth. Topping $2 billion in revenue would be quite an achievement, and its $6.4 billion valuation is massive. However, as the company approaches an IPO, it's worth noting the lower valuation multiple.

It would appear that investors are less bullish on the company. Either Compass' growth is expected to slow dramatically in future years, or the company is being valued more as a traditional brokerage and less as a high-flying technology company.

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