Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
"The below linked Forbes article that discusses the recent valuation debacle that has ensnared WeWork. The article is written by Mike DelPrete, who is the source for much of the iBuyer data that we've all discussed over the past several months. I really encourage you to read this article. Mike covers how the WeWork troubles also bleeds over to Compass and Opendoor - two other companies that are 100% dependent on the same venture capital source (Softbank) that funds WeWork.
It would appear that investors may be reaching a point where market share alone is not enough to justify continued infusions of millions, if not billions of dollars ... and that actually making a "profit" or at a minimum, having a pathway to being profitable is a consideration when looking at a business model. Novel idea, I know! Mike, who has done more research in this space than anyone, is forecasting that significant changes must come to venture capital backed businesses for continued investments to make any practical, if not even financial sense. For example, he points out Compass' valuation at 6.4 billion, when Realogy, which is already publicly traded, did 42 times the number of transactions, 11 times the sales volume, 7 times the revenue and actually made a profit - but is valued far less at under 4 billion See why the game may be up."
Compass’ business model is fueled by capital. It has raised more than $1.5 billion, which it is using to acquire brokerages and recruit agents at an unprecedented scale. It is turning dollars into agents, which in turn generate revenue.
Opendoor has raised over $1 billion—more than 10 times its nearest competitor—and has used that capital to fuel a rapid national expansion (in addition to launching a mortgage venture and acquiring a title company). Opendoor is on track to purchase around 17,000 homes in 2019.
-------------
If the pressure from the public markets continues to push for profitability, it may accelerate (or force) a change in the operating economics at Compass and Opendoor, which up until now have fueled their massive growth with massive expenditures.
A drive to increase revenue could lead Opendoor to raise its fees, or Compass to reduce its generous commission splits with agents; either move would severely limit growth. Reducing expenses would come in the form of office consolidation (Compass has over 250 offices across the U.S.), ratcheting down employee perks, or even staff layoffs.
WeWork’s valuation compared to other REITs, like say Regus, who in spite of what WeWork is shoveling, has been in their business for a long time is pretty comical. It’s a house of cars waiting for a stiff breeze.
It would appear that investors may be reaching a point where market share alone is not enough to justify continued infusions of millions, if not billions of dollars ... and that actually making a "profit" or at a minimum, having a pathway to being profitable is a consideration when looking at a business model. Novel idea, I know! Mike, who has done more research in this space than anyone, is forecasting that significant changes must come to venture capital backed businesses for continued investments to make any practical, if not even financial sense. For example, he points out Compass' valuation at 6.4 billion, when Realogy, which is already publicly traded, did 42 times the number of transactions, 11 times the sales volume, 7 times the revenue and actually made a profit - but is valued far less at under 4 billion See why the game may be up."
This whole game of valuation based solely on market share and completely ignoring profitability never made any sense to me. If a business can't turn a profit it will either need constant infusions of cash or will go out of business. Neither of those are positive outcomes IMO. As you say, there has to at minimum be a path to profitability.
I was talking with a friend about the whole WeWord situation. Apparently, it's a complete debacle. The CEO is leasing to the company real estate he owns and vice-versa. The whole situation smells like Limburger that's been left out in the sun for a few days.
Having interviewed at Compass when I changed brokerages a couple years back I can say they are literally not only buying other brokerages but also buying individual agents. They are throwing money around like they have a field of money trees behind each office. No way that's sustainable. Plus, most of the perks they offered me expired after the first year.
I sorta like the Chinese angle, where companies have to show profit for 3 years to trade publicly.
Well that just encourages fiddling with the books.
I've never seen this as a disruption. Coworking space with services used to be very common. Bunch of single offices sharing a secretary/photocopy machine for example. Most office buildings had them. Problem is that with email, cell phones, laptops, and desk top copy/scan/print machines that cost 100 bucks commercial landlords shut them all down since no one would pay the premium for them anymore.
These throwback companies are catering to a tiny segment of the office market. 1. People who travel a lot and need something beyond hotel business center and desk in hotel room. 2. Markets so expensive for office space people can't afford a one room office. (in my market monthly rent for a one room office is $300 a month, or six days of wework) 3. People who think it's "cool" or "prestigious" or want to socialize with other people there.
This is a sliver of the office space market. It's why they are losing money. It's not a new idea, it went away because it wasn't profitable. It'll get really bad when the economy tumbles and people save by canceling their membership and working out of their house. They'll still owe their landlord's the rent.
Well that just encourages fiddling with the books.
I've never seen this as a disruption. Coworking space with services used to be very common. Bunch of single offices sharing a secretary/photocopy machine for example. Most office buildings had them. Problem is that with email, cell phones, laptops, and desk top copy/scan/print machines that cost 100 bucks commercial landlords shut them all down since no one would pay the premium for them anymore.
These throwback companies are catering to a tiny segment of the office market. 1. People who travel a lot and need something beyond hotel business center and desk in hotel room. 2. Markets so expensive for office space people can't afford a one room office. (in my market monthly rent for a one room office is $300 a month, or six days of wework) 3. People who think it's "cool" or "prestigious" or want to socialize with other people there.
This is a sliver of the office space market. It's why they are losing money. It's not a new idea, it went away because it wasn't profitable.
For those who would fiddle, there is always a reason to fiddle with the books.
This whole game of valuation based solely on market share and completely ignoring profitability never made any sense to me. If a business can't turn a profit it will either need constant infusions of cash or will go out of business. Neither of those are positive outcomes IMO. As you say, there has to at minimum be a path to profitability.
I was talking with a friend about the whole WeWord situation. Apparently, it's a complete debacle. The CEO is leasing to the company real estate he owns and vice-versa. The whole situation smells like Limburger that's been left out in the sun for a few days.
It's more than a debacle. It's a well-engineered fraud. I don't understand how so many supposedly intelligent investors got scammed including SoftBank, JP Morgan and Goldman Sachs. Adam's (one of the founders) wife convinced SoftBank to throw her a separate $100 million for her equally hair-brained scheme WeGrow. WeWork has raised $14 billion, 140 times the pre-IPO capital that Google did.
For example, he points out Compass' valuation at 6.4 billion, when Realogy, which is already publicly traded, did 42 times the number of transactions, 11 times the sales volume, 7 times the revenue and actually made a profit - but is valued far less at under 4 billion See why the game may be up."
Can't be repeated enough!
Realogy - with multiple brokerages and even lines of business - may or may not be well-run. But it's been around a long time, is 10x the size of Compass, makes a profit ... but speculators are willing to put their free cash behind Compass.
There's been a lot of "Wall Street" that sees 5.5MM sales x $378K average x 6% and thinks $125B.
Realogy has operating income of 11% and a net profit margin of 4%. Realogy has about a 20% market share nationwide - after all these years.
Realogy - with multiple brokerages and even lines of business - may or may not be well-run. But it's been around a long time, is 10x the size of Compass, makes a profit ... but speculators are willing to put their free cash behind Compass.
There's been a lot of "Wall Street" that sees 5.5MM sales x $378K average x 6% and thinks $125B.
Realogy has operating income of 11% and a net profit margin of 4%. Realogy has about a 20% market share nationwide - after all these years.
So how is Compass worth more than 1.5X Realogy?
It's not. They are worth nothing right now.
HomeServices surpassed even Realogy in transactions last year and as a wholly owned part of Berkshire Hathaway, are valued at approximately 460 billion.
But these are solid companies with histories and real profits.
This reminds me of the late 90's and the technology bubble that burst as the internet companies were trying to figure out how to make money. A lot of money flowed into those companies. A few made it like Amazon. Most did not and we had a pretty good bust.
Realogy - with multiple brokerages and even lines of business - may or may not be well-run. But it's been around a long time, is 10x the size of Compass, makes a profit ... but speculators are willing to put their free cash behind Compass.
There's been a lot of "Wall Street" that sees 5.5MM sales x $378K average x 6% and thinks $125B.
Realogy has operating income of 11% and a net profit margin of 4%. Realogy has about a 20% market share nationwide - after all these years.
So how is Compass worth more than 1.5X Realogy?
Because the guys at Compass have somehow managed to convince all of these supposedly smart IB folks that they are a technology company and not a real estate brokerage like Realogy. So, they should be valued as such.
Anyway, seems there's a lot of turmoil at Compass in general:
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
