Compass Is Leading Its Market Higher

Compass Guidance Underestimates Its Own Potential

Compass (NASDAQ: COMP) is emerging as one of the most interesting stories in the real estate market today. There are many ways to invest in the real estate market but few with the growth trajectory or exposure to digital and e-commerce of Compass. The company operates as an end-to-end, cloud-based platform connecting agents with buyers and sellers and it is a package that is working. The company says it's added 25% more agents over the past year, nearly doubled its market share of the US residential market, and driving very solid growth on both the top and bottom lines.

Compass Blows Past Consensus And Guides Higher

Compass was expected to report a strong quarter, and one supported by secular housing trends within the US market, but not quite the quarter it did. High demand and high prices are fueling transactions despite the availability of homes and Compass is serving as a high-volume middleman. The company reports $1.95 billion in net consolidated revenue which beat the consensus by 2400 basis points. The revenue is good for growth of 186% over the past year and that strength is driven by both an increasing agent count and an increase in transaction volume. On a transactional basis, the company reports volume is up 140% compared to the 32% posted by the broad retail market.

Moving down the report, the details are equally good. Although the GAAP operating margin is still negative it shrank by a wide margin and resulted in a near break-even quarter for the company. On an adjusted basis, the operating margin improved 12% and came in at 3.7%. Regardless, the bottom line GAAP loss of  $0.02 beat the consensus by $0.12 and has the company on track to post profits within the next quarter or two.

Looking forward, the guidance is both robust and cautious in light of the Q2 performance. The company is expecting to see revenue slow in the third and fourth quarter of the year but still come in strong enough to blow past the full-year consensus estimate. The new guidance expects full-year revenue in the range of $6.15 billion to $6.35 billion versus the prior range of $5.35 to $5.55 and the consensus of $5.55. The guidance is assuming $1.65 billion in revenue in the third quarter and $1.45 in revenue for the fourth quarter at the low end of the range which we view as very cautious indeed.

The Analysts Like The Direction Compass Is Headed

The analysts were bullish on Compass before the Q2 earnings report and have become more so in the day since. At least three major sell-side analysts have come out with notes Including one upgrade from neutral to buy and two price target increases. The consensus of these three analysts is near $23 and in line with the broader consensus although the high price target is $26. The consensus of $23 implies an upside of nearly 45% relative to the recent price action. No analysts rate the stock as a cell.

The Technical Outlook: Compass Is Breaking Out And Headed Higher

Shares of Compass have had a bit of a shaky start since the IPO but appear to have established a bottom near the $13 level. Price action has been heading higher over the past two weeks and is now breaking above a potentially strong resistance point in confirmation of a reversal. If support is able to hold at the $16 level, we see this stock moving up to the $20 level at least. Looking forward, strong results in the third and fourth quarter are expected and should help lift price action above the $20 level and up to new highs by the end of the year.