Softbank-backed leading real estate technology company Compass Inc. (COMP), which is headquartered in New York City, made its stock market debut last year and its stock jumped nearly 18% in price, gaining a market value of $8.22 billion. However, the company has failed to fully capitalize on the investor optimism surrounding the housing market and is down 55% since its market debut, closing yesterday's trading session at $9.06.

Furthermore, the stock is currently trading below its 50-day and 200-day moving averages of $10.19 and $13.32, respectively, indicating bearish investor sentiment. And with mortgage rates rising this year, making home-buying less affordable, the housing market could be negatively impacted going forward.

This, along with COMP's financial instability and negative profit margins, could cause its share price to retreat further in the near term.

Here is what could shape COMP's performance in the near term:

Inorganic Growth Strategies

Last September, COMP agreed to acquire three companies, the first being the LegacyTexas Title Co., a leading title insurance company that serves Dallas-Fort Worth. The next is the First Alliance Title LLC, a leading title company that serves the Denver metro area; and the third is the CommonGround Abstract, LLC, a leading title company that serves Pennsylvania and New Jersey. These acquisitions extend the company's growing portfolio of title and escrow businesses that now serve nine states. However, COMP's widening losses and negative profit margins exhibit the company’s inability to grow internally, posing a major downside risk for the stock in the near term.

Inadequate Financials

COMP's revenue increased 46.7% year-over-year to $1.74 billion for the third quarter, ended Sept. 30, 2021. However, its operating loss grew 655.6% from its year-ago value to $100.5 million. Its operating expenses rose 53.5% year-over-year to $1.84 billion. And the company's net loss surged 693% from the prior-year quarter to $99.8 million, while its loss per share came in at $0.25.

Weak Profitability

COMP's 0.70% trailing-12-months CAPEX/Sales multiple is 80% lower than the 3.5% industry average. Also, its ROC, Levered FCF margin, and net income margin are negative 13%, 0.21%, and 6%, respectively. Furthermore, its $78.3 million trailing-12-month cash from operations is 63.8% lower than the 216.29 million industry average.

POWR Ratings Reflect Uncertainty

COMP has an overall D rating, which equates to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. COMP has an F grade for Growth and a D for Quality. The company's weak financials and poor profitability justify these grades.

Of the 167 stocks in the F-rated Software – Application industry, COMP is ranked #129.

Beyond what I have stated above, you can view COMP ratings for Value, Growth, Quality, and Sentiment here.

Bottom Line

While COMP's continuing efforts to expand its portfolio bodes well for the company eventually, its inability to generate sufficient cash flows is affecting its price performance. In addition, the company's weak financial health and uncertainties regarding the housing market’s prospects could raise investors' worries surrounding the stock's performance. So, we believe the stock is best avoided now.

How Does Compass Inc. (COMP) Stack Up Against its Peers?

While COMP has an overall D rating, one might want to consider its industry peers, Open Text Corporation (OTEX), Progress Software Corporation (PRGS), and Commvault Systems Inc. (CVLT), which have an overall A (Strong Buy) rating.

Click here to check out our Software Industry Report

COMP shares rose $0.02 (+0.22%) in premarket trading Wednesday. Year-to-date, COMP has declined -0.11%, versus a -0.85% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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