Profitability can be reported in a variety of ways: Net Profit, EBITDA, Adjusted EBITDA, Adjusted Net Profit, Gross Profit, and cash in the bank are just a few possible metrics.

Why it matters: While each is important, none really measures the actual profitability of the core operating business model.

• Because before debt repayments, stock buybacks, and acquisitions, what really matters is how much cash the business generates, and that metric, buried in the Cash Flow Statement, is net cash provided by operating activities.

Using net cash provided by operating activities as the baseline, it’s possible to compare the business models and relative profitability of the top publicly-listed real estate companies.

• The measure here is business model efficacy – cut through the hype, misleading metrics, and adjacent financial maneuvering to look at the core business: does it make money?

In 2023, Zillow and eXp Realty, followed closely by Anywhere, were all cash-generation machines. 

• Zillow often gets lambasted as being “unprofitable” (on a net profit basis) and eXp’s business model has been questioned for years, but both generate a lot of cash.
   

• Opendoor’s financials are unintentionally obfuscated behind the massive cash inflows and outflows of buying and selling real estate – this analysis excludes those cash flows for all iBuying activities.

Historically, these companies are generally either consistently profitable or unprofitable.

• Zillow, HomeServices of America, eXp, and, for the most part, Anywhere, have all been profitable since 2018, with 2021 a notable highpoint.
   

• Opendoor, Compass, and Redfin have all been generally unprofitable during the same period (Redfin was briefly profitable in 2020 and 2021).

Over the past six years, the most profitable companies have deployed their free cash in very different ways.

• Zillow and Anywhere, two very different companies whose only similarity is that they’re both in real estate, have each generated about $2 billion in cash since 2018.
   

• Zillow used that cash to grow, investing over $1B in acquisitions, while Anywhere used it to pay off about $1B in debt (only $2.3B to go!).

The same trends continue into 2024 with Zillow and eXp continuing to generate large amounts of cash, with a few other noteworthy outliers. 

• Compared to the same time last year, the biggest improvement in cash flows has been at the most unprofitable companies (Opendoor, Compass, and Redfin), which have been energetically cutting costs and reducing expenses.
   

• The large Q1 cash burn at Anywhere is seasonal, and highlights the fluctuations of a traditional brokerage business (eXp, however, still generated cash).

The bottom line: It may sound elementary, but a real business needs to have a business model that works – and that’s consistently making more money than it spends.

• It is those businesses – generating free cash flow – that are able to invest for growth, give returns to shareholders, and use the profits to launch new ventures to add value in the real estate ecosystem.
   

• Even with plenty of cash in the bank, companies whose core business is unprofitable are much more constrained in their operations and can’t survive forever; either the business model pivots or the company will cease to exist.