Profitability as Proxy for a Healthy Business Model
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In 2023, the largest, publicly-listed real estate companies had another unprofitable year with over $1.1 billion in losses.
Why it matters: Profitability is an important metric – it’s a proxy for a healthy business model that has product market fit, is financially viable, and can generate returns for shareholders.
Dig deeper: Net Income (or Loss) is the standard, GAAP-friendly, apples-to-apples method to report a company’s overall financial profitability (or lack thereof).
Of all the public companies in the real estate ecosystem, eXp Realty was closest to profitability in 2023, while Compass and Opendoor had the largest losses.
Net Margin is a company’s net loss proportional to its revenue – losing $100 million is different for a company with $1 billion in revenue compared to a company with $100 million in revenue.
Net margin is an illuminating measure of a company’s business model; how effective is it at generating profits for shareholders? Is the company a cash generator or a cash incinerator?
eXp once again comes out on top, but the outlier is Redfin, which, proportional to revenue, was significantly less profitable and less capital efficient than its peers.
The Net Income of the “biggest losers” is being dragged down by large stock-based compensation expenses (compensating staff with stock options and grants).
In 2023, Zillow had $451 million in stock-based compensation expense, Compass $158 million, and Opendoor $126 million.
These equity awards are a non-cash expense, but they do have a cost: diluting shareholders.
With exponentially higher stock-based compensation expense than any other company, Zillow is the noteworthy outlier in the chart above.
Without it, the company would be materially profitable (along with eXp Realty and Real).
Net loss per transaction is another method to highlight business model efficiency, similar to OpEx per transaction.
The low-fee brokerages, with lower operating expenses, and Anywhere with its large franchise network, have the smallest net loss per transaction.
Note: for Zillow, I’ve assumed 3 percent of 4 million transactions.
Throwing Opendoor into the mix highlights the inherent challenges of iBuying: comparatively, and in the current market, it’s a much less profitable business.
The bottom line: Profitability is not the same as cash flow; unprofitable businesses are not necessarily losing money or at risk of going bankrupt.
But it is a valid measure to consider when evaluating the merits of a particular business model – eventually, a business needs to make money.
For the time being, the most profitable – or least unprofitable – companies are traditional brokerages, especially cloud-based ones, while the disruptors and tech companies continue to struggle with sustained profitability.
