I read with interest that one of the firms that publishes rankings had disallowed at least one firm from being included in the rankings in part because of their lack of profitability.
Having published rankings for 35 years, I found it interesting that a publisher that had never before disqualified any entrants — or at least said they were doing so for that reason — now felt that they should do so.
Even Realogy had years when they had no “earnings.” In most cases, they had positive cash flow, but for public reporting purposes, they had a net loss after one-time costs of other items.
Further, if making a profit were a prerequisite for being ranked, I would imagine that all the other 500+ brokerage firms that they are ranking satisfied that requirement.
The law of imperfect data
The other issue raised was that of the apparent inability of Compass to separate commercial transactions from residential transactions. This is a worthwhile and important factor and could well be the basis for such disqualification. However, when we required them to breakout the commercial from the residential transactions, they were ready and willing to do so.
There is an important point to make about the RealTrends 500 rankings and those of the other firms that also provide this service to the industry. These rankings and the numbers that are produced have always been subject to what I will call the “law of imperfect data.”
For example, every year that brokerage firms or national networks submit data to us between 10 and 20% of the firm’s data of some form is incorrect when initially submitted. This isn’t purposeful. Among the national networks who submit for their franchised brokerage firms, this is also true. We ultimately get to the right numbers, or as close as possible given the data systems that are doing the collecting.
But that fact is that brokerage and franchised organizations count things differently, use different systems from each other to do the counting, and have to depend on data sources that they don’t actually have control over.
Anyone who thinks that any of the publishers of rankings, brokerage companies or national franchise entities, can say that their data is perfect and always accurate is not being candid.
Measuring brokerage profitability and company value
There has been much said about the profitability or lack thereof among some of the large, national publicly held brokerage enterprises. There has been just as much attention on the market valuations of these firms.
Should you have been watching, you may have noticed the almost all the publicly held firms have suffered substantial declines in their market valuations over the last six to nine months. Let’s just say that these firms are getting closer to what would be considered rational valuations.
On profitability there is a different view — it is not uncommon for firms that are still in the start-up and high-growth stage of their business to place a higher emphasis on growth rather than profitability.
Does the brokerage have a path to profitability?
Another thing to consider is whether a firm has a plan or a path to get to profitability. This issue is not one to be overlooked when looking at the future potential of an enterprise.
Each analyst can make their own determination of whether a firm has such a path or is just in love with their own corporate story. In recent times, we have seen many of both. Think Tesla or Amazon on the one hand and WeWork on the other. The former lost billions of dollars in their growth stages and now produce substantial earnings while the other had no discernible path to profitability but was deeply in love with their own story.
In our industry, such firms as Compass, Redfin, Zillow and Opendoor, to name a few, are not profitable. Some have negative cash flow while others have positive cash flow. It is interesting to note that industry standard bearers Realogy and RE/MAX have had periods with no earnings (public GAAP earnings) yet were strongly cash-flow positive.
One of the big differences we note is that while Realogy and RE/MAX are considered strong operating companies, they also lack the high-growth top line stories of those we mentioned above. This likely affects market valuations more than anything else.
Of the four firms listed above — Compass, Redfin, Opendoor and Zillow—the question really is do they have a path to profitability or don’t they? Do they have a future where their growth will equate to consistent earnings? You can make your own decision about the future of these companies.
What about Compass and Zillow?
Then we come back to all the chatter about the lack of profitability among companies like Compass and Zillow, the two we hear and read about the most. My view is that they are both still fast-growing, new companies that are getting their legs underneath them.
There are different reasons for their current lack of profitability. In Zillow’s case, it’s mostly the departure from iBuying that hurt their profitability. But, did you examine their cash flow and their balance sheet? Both are very strong.
In the case of Compass, they just spend over a billion dollars to assemble on the largest brokerage firms in the country in less than 10 years. Yet, even with that, they had a small positive cash flow and a very strong balance sheet with lots of cash and little-to-,no debt.
In both cases, I also believe they have a credible path to long-term profitability and growth. Forget current events with both — think longer term.
Steve Murray is a senior advisor for RealTrends and a partner with RTC Consulting.
This column does not necessarily reflect the opinion of RealTrends’ editorial department and its owners.
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