The numbers are eye-popping.
Zillow has a $20 billion stock market valuation. iBuyer pioneer Opendoor will have an estimated $4.8 billion valuation as it goes public through a SPAC, a special purpose acquisition company. Redfin has a $4.5 billion valuation. Next in all likelihood is a Compass IPO — get ready for another sky-high valuation.
What is with these staggering numbers?
In surfing, a double-up or humpback is when two waves combine; one large wave closely follows another one. A surfer who can navigate a double-up wave experiences the ride of a lifetime.
These growing real estate companies are riding a triple-humpback. Wave one: a strong real estate market. Wave two: a surge in technology adoption. Wave three: Wall Street’s continued infatuation with tech stocks.
These valuations give the ZORC quartet (Zillow, Opendoor, Redfin and Compass) an edge in the real estate market. They are all raising staggering sums of money to grow market share, build more advanced technology tools, recruit top talent and reshape how real estate is bought and sold.
Plus, they are all beginning to compete with each other, not just with traditional companies like RE/MAX, Keller Williams and Realogy.
Zillow and Opendoor are in a fierce business battle, which leads to more consumer features, expanding platform reach and more competitive pricing. While iBuying is a small part of the housing market today, the strength of these two companies alone will greatly expand the iBuying phenomenon.
Consider ride sharing, essentially zero 12 years ago, reaching $100 billion in market size this year in large part due to the innovation by the two leaders Uber and Lyft. And car sharing has only penetrated an estimated 18 percent of the overall personal travel market. Everything big starts small.
Look at the same competitive story with Compass and Redfin. Compass bought share, Redfin built share. Either way, they are now in a competitive face-off — like RE/MAX and Century 21 a quarter century ago.
While the Compass tech connection still seems like a stretch, the brand and platform it is building put it in the favored investor box. Consider its estimated enterprise valuation of $6.4 billion in its latest $370 million funding round.
Plus, when it goes public, it will likely put out some impressive sales and top line revenue numbers because of the strength of the housing market and its share of top-producing agents.
To keep up with Redfin’s methodical expansion as both a brokerage and a consumer portal, Compass must deliver a direct consumer experience. Compass recently announced a new set of consumer tools. Competition will accelerate among these two and put pressure on established firms to innovate.
Compass CEO Robert Reffkin is still comfortable straddling two worlds. “There are technology companies that focus on agents but not the consumer, and there are technology companies that focus on the consumer but not the agent,” Reffkin said on CNBC recently. “We’re unique in that we’re focusing on both and really allowing them to collaborate together.”
If Compass is so lucky to be a tech darling when it trades on the public markets, its agent stock option compensation program could also become competitive with eXp and Keller Williams wealth sharing programs, though it is too early to tell if the shares will be enough to fill the average agent’s pocketbook.
EXp’s market cap is currently $2.7 billion, double that of Realogy but still in the category of a traditional brokerage or franchise operation. Currently, it is rewarded on agent growth and a robust housing market which is lifting all boats, including agents, small brokerages and anyone who touches home sales or mortgages.
If eXp can convince Wall Street that it is also a technology business, then it too could see a swollen valuation.
Of course, stock valuations do not tell the entire story of how a company is really doing. Momentum investors pump up some business losers.
And just like a humpback wave can wipe out the best surfer, inflated stocks can crash and burn.
But the ZORC quartet are, for this moment at least, surfing pretty.