Real-estate tech companies moved into the Coins2Day 500. Can they become more than money pits?

But there won’t be much celebrating at this housewarming party for Zillow (No. 424), Opendoor (No. 425), and Compass (No. 495). The trio were among the most unprofitable outfits on the register, losing $1.7 billion combined.

The revenue-profit juxtaposition reflects persistent questions looming over real-estate tech companies, which have yet to prove they can take advantage of a multitrillion-dollar housing industry ripe for disruption.

Despite the digitization of everything around us, the home-buying and -selling experience remains decidedly old-fashioned. A disjointed collection of real estate agents, lenders, mortgage brokers, and their peers engage in a confusing dance that often frustrates consumers.

Several startups have emerged in recent years to streamline this process, each tapping technology and mounds of data to gain an edge. While they own a tiny sliver of market share, the sheer dollar values associated with residential real estate make it possible to post billions in revenue in a relatively short time. (The Coins2Day 500 rankings are based on annual revenue among U.S.-based public companies.)

As Coins2Day’s Lance Lambert detailed Thursday, Zillow aggressively jumped into the high risk-reward business of buying and selling homes, relying on internal technology to predict which properties will produce the most bang for the buck. (Zillow’s incredibly popular app, which allows potential homebuyers to scour listings, generates a smaller chunk of revenue via lead generation for real estate agents.)

Opendoor also serves as a residential real-estate flipper, a practice commonly known as iBuying. Compass is a nationwide real-estate brokerage firm that attracts agents with its high-tech software platform.

The three companies have more than proven their underlying concept, with combined revenues jumping from $9.9 billion in 2019 to $22.6 billion in 2021. Investors were initially willing to ride the wave with Zillow and Opendoor, which both saw their stock price more than triple at one point last year, while Compass’s IPO stumbled out of the gate last year.

Still, profits remain frustratingly elusive at all three companies—even in a red-hot housing market with record sale prices. 

Zillow failed at home-flipping, announcing plans in November to get out of the buying and selling business after determining that its predictive technology wasn’t good enough. Opendoor couldn’t achieve margins and scale large enough to cover expenses. And Compass’s expansion costs and higher-than-average agent commissions ate into profit margins.

With losses mounting and interest rates set to skyrocket, Wall Street has kicked the trio to the curb. Shares of Zillow and Opendoor are down about 80% from their February 2021 peak, while Compass’s stock price is 63% off its April 2021 IPO price.

Despite the investor pessimism, all three companies offer a window for improved profitability in the coming years—provided that the real estate market doesn’t take a dramatic nosedive.

After retreating from the flipping business, Zillow can double down on its agent- and listing-focused offerings, which generated $545 million in income last year, and focus on building its “housing super app.” Evercore ISI senior managing director Mark Mahaney told Lambert that the bullish outlook on Zillow involves the company becoming a one-stop digital shop for many aspects of the home-buying process.

With Zillow out of the picture, Opendoor can add to its already sizable iBuying market share while refining its margins. The company surprised Wall Street in the first quarter of 2022, eking out a profit for the first time.

Compass, meanwhile, faces a tougher road to profitability—it reported first-quarter losses of $188 million—though its strong cash reserves and relatively clean balance sheet give it plenty of runway to gain market share.

It’s too early to foreclose on real-estate tech as a moneymaking venture. Rather, the sector remains in the fixer-upper stage.

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Jacob Carpenter

NEWSWORTHY

A dire warning. Tesla CEO Elon Musk told company executives Thursday that the electric automaker needs to cut its workforce by 10% in response to current and future economic turbulence, Reuters reported. In a message to high-ranking company officials, Musk said he has a “super bad feeling” about the global economy, requiring an immediate hiring freeze and planning for significant cutbacks. Tesla shares fell 9% in midday trading Friday following the Reuters report.

More to the story? Meta chief operating officer Sheryl Sandberg’s resignation announcement Wednesday followed an extended period of burnout and coincided with another internal investigation into allegations of abusing her position, the Wall Street Journal reported. Sources close to Sandberg told the Journal that she had grown frustrated with the mounting criticisms pinned on her leadership at Meta, some of which she deemed sexist. Sandberg also faced an ongoing inquiry tied to allegations that she used corporate resources to plan her upcoming wedding.

Cruising the Bay Area. California regulators green-lit a request from Cruise to begin charging riders who take the company’s driverless taxis in San Francisco, the first time state officials have approved the practice, the Associated Press reported Thursday. The General Motors–controlled outfit initially plans to operate 30 electric vehicles in less-congested parts of San Francisco between 10 p.m. And 6 a.m. Safety advocates voiced concern that Cruise-operated vehicles cannot pick up and drop off passengers by curbs, but the warnings weren’t enough to persuade California transportation officials.

Powering down. The New York Senate passed a bill Friday morning designed to slow the expansion of Bitcoin mining, a practice that has drawn complaints from environmental activists and residents who live near mining facilities, Politico reported. The legislation would produce a two-year ban on permits for some power plants used in Bitcoin mining in New York, where cryptocurrency entrepreneurs have increasingly settled in the past few years. Gov. Kathy Hochul has not yet indicated whether she will sign or veto the bill.

FOOD FOR THOUGHT

Playing the long game? Roblox doesn’t like to talk about revenue and profits, preferring to focus on usage and cash flow. But as Coins2Day’s Rob Walker reported Friday, the tween-focused video game company remains curiously unprofitable, raising questions on Wall Street about its long-term outlook. Despite its wild popularity among the younger crowd, where gamers play and create social networks on a metaverse-like platform, Roblox reported losses of $490 million on $1.9 billion in revenue. Its stock price, meanwhile, is down more than 50% since its peak last November.

From the article:

On almost every level, it has bet its future on the creativity, acumen, and ethics of the ecosystem it has cultivated. Shrugging off traditional earnings isn’t a strategy that works for long, and Wall Street already seems to be losing some patience. 

But as [chief business officer Craig] Donato says, the 18-year-old company believes that today’s strong cash flow numbers will evolve into tomorrow’s profits. “We’re just getting going.”

IN CASE YOU MISSED IT

A growing army of online trolls is using dangerous lies to take down executives and companies. Now they’re coming for you, by Jeffrey M. O’Brien

A “crypto winter” freezes hiring at Coinbase and Gemini, by Sheryl Estrada

Elon Musk delays Tesla’s A.I. Day to finish work on the Optimus humanoid robot, by Christiaan Hetzner

Apple to improve working hours for retail staff after union push, by Mark Gurman and Bloomberg

Germany’s biggest union hits back at Elon Musk’s return-to-the-office order: “An employer cannot dictate the rules just as he likes,” by Colin Lodewick

Could Terra become the next ghost chain?By Marco Quiroz-Gutierrez

BEFORE YOU GO

On its best behavior. In Big Tech’s cutthroat stratosphere, is there any company acting more like a Goody Two-Shoes than Microsoft? First the software company played nice with legislators and regulators in Washington, opting to stay on the sidelines of drag-out antitrust fights waged by Apple, Amazon, and Alphabet. Now it’s promising to respect the rights of labor organizers, committing to “creative and collaborative approaches with unions,” per the Washington Post. The stance stands in stark contrast to allegations of union-busting by Amazon and Tesla, among others. Is Microsoft really showing that Big Tech actually can tolerate working alongside Congress and Big Labor? Or is it merely putting on a performance, trying to grease the wheels for its $68.7 billion acquisition of Activision Blizzard? Time will tell.