What Analysts Expect When Compass Stock Lockup Ends

Robert Citrone, co-founder of Discovery Capital Management; Masayoshi Son, CEO of SoftBank; Robert Reffkin, Compass CEO; Ori Allon, founder and executive chairman of Compass (Getty Images)

About 200 million Compass shares could hit the market Tuesday when broker IPO restrictions are lifted.

The end of the 180-day lockout period, which prevented Compass’s largest shareholders, directors and officers from selling their holdings, means float stocks — stocks that can be traded — more than double.

What happens when all those stocks become tradable tomorrow depends on the patience of investors and their view of the Compass business model. The company has been both praised and criticized for its rapid growth fueled by acquisitions and aggressive recruitment of top agents from competing companies.

It’s an indication of how much confidence they have in the company, said David Trainer of New Constructs. The trainers investment research firm rates the stock as unattractive, the equivalent of selling, citing the company’s spending and not creating lasting competitive advantages.

Certain investors who bought at the pre-IPO price of $18 per share are subject to the lock-up. At Monday’s close of $13.54, those shares were down about 25 percent. Investors who bought on the New York Stock Exchange at the starting price of $20.15 when it debuted on April 1 fell about 33 percent.

Compass insiders covered by the lock-up include major shareholders and venture capital investors who have contributed $1.5 billion in pre-IPO financing since the company’s inception in 2012. Compass’ board of directors, founders, CEO Robert Reffkin and executive chairman Ori Allon, and other key executives were also subject to the six-month lock-up.

Analysts are divided on Compass’ long-term outlook, although most expect the stock to fall once the lock-up lifts, at least initially.

New constructions shorted Compass from its IPO until the end of August said its short position outperformed expectations by 36 percent. During that period, Compass’s share price fell 24 percent, compared to the S&P 500’s gains of 11 percent.

Jason Helfstein of Oppenheimer has given the brokerage an outperform rating with a target price for Compass shares of $25. Helfstein said he expects Compass to repeat the pattern that generally occurs when insiders can start trading their IPO shares: stock prices fall as the lockup period ends and then rise.

In July, after Compass shares fell about 39 percent from their debut, Helfstein said the broker’s lack of liquidity was the biggest factor keeping investors away, not his company. If it was, that issue may be resolved at the end of the lockup.

The elephant in the room is Softbank, which owns 33.5 percent of Compass, and has not indicated its plans.

Softbank owns a third of the company, so the question is what are they doing now? said Helfstein.

In July, Softbank, one of the world’s largest tech investors, sold 45 million shares in Uber worth about $2.1 billion in a block trade through Goldman Sachs. Last month, the company re-sold 11.4 million shares worth about $2.2 billion to Doordash through a block trade handled by Goldman Sachs, Bloomberg reported:. The recent sell-off came after Softbanks’ investment in Chinese rideshare company Didi Global tanked. The company’s shares fell about 43 percent from its IPO after Chinese regulators forbidden it from the country’s app store pending a security review for alleged violations when handling personal data.

Softbank owns more than 132 million Compass shares, according to Yahoo Finance. The second largest holder is Discovery Capital Management, with 33.6 million shares or nearly 9 percent of the company.

Other investors who supported Compass in its pre-IPO fundraising efforts are also subject to lock-up agreements, according to the disclosures. Those investors include Institutional Venture Partners, which also back Coinbase and Robinhood, and have a 3 percent stake in Compass. Wellington Management Company owns 10.6 million shares, or 2.69 percent of the company, while Winslow Capital Managements owns 7.8 million shares and Joshua Kushner’s 7 million Thrive Capitals is just 2 percent shy.

Fidelity Investments, which led to a $100 million funding round for Compass in 2017, owns approximately 6 million shares representing 1.5 percent of the brokerage. The Canada Pension Plan Investment Board owns 3 million shares, and hedge funds Zimmer Partners and Alta Park Capital own approximately 2.3 million shares each.

The brokers’ lockout period could have been shorter if the stock price had risen 25 percent for five out of ten consecutive trading days compared to the $18 initial offer price. days should trade for about $22.50, which never happened.

As of August 31, investors are short of 4.64 million shares, accounting for 2 percent of traded float and 1.18 percent of all outstanding shares. That’s less than the short-term interest rate of 6.37 million shares as of closing on July 7.