Mike DelPrete makes the case for various financial metrics and believes that at the end of the day, businesses ultimately need to make money.
This article is shared here with permission from Mike DelPrete of Inman Intel, the data and research arm of Inman that provides insights and market intelligence on the residential real estate and proptech businesses. Subscribe now.
The largest publicly traded real estate companies had another unprofitable year in 2023, losing more than $1.1 billion.
why this is important: Profitability is an important metric – it is a proxy for a healthy business model that has product-market fit, is financially viable and delivers returns to shareholders.
you deeper: Net income (or loss) is the standard, GAAP-compliant, equivalent method of reporting a company’s overall financial profitability (or lack thereof).
- Of all the public companies in the real estate ecosystem, eXp Realty is the closest to making a profit in 2023, while Compass and Opendoor have the biggest losses.
Net profit rate is that a company’s net loss is proportional to its revenue – a company with $1 billion in revenue is different from a company with $100 million in revenue losing $100 million.
- Net profit margin is an instructive measure of a company’s business model; how effective is it in generating profits for shareholders? Is the company a cash generator or a cash incinerator?
- EXp again tops the list, with the exception of Redfin, which is significantly less profitable and capital efficient than its peers in proportion to revenue.
net profit The “biggest losers” are being weighed down by huge stock-based compensation payouts (compensating employees with stock options and grants).
- In 2023, Zillow’s stock-based compensation expense will be $451 million, Compass’ $158 million and Opendoor’s $126 million.
- These equity awards are non-cash payments, but they do have a cost: dilution to shareholders.
has an exponentially higher Zillow has more stock-based compensation expenses than any other company and is a noteworthy outlier in the chart above.
- Without it, the company would be materially profitable (along with eXp Realty and Real).
Net loss per trade is another way of emphasizing the efficiency of the business model, similar to operating expenses per transaction.
- Low-fee brokerages have lower operating expenses, and Anywhere has a large franchise network with minimal net losses per trade.
- Note: For Zillow, I assume 3% of 4 million transactions.
Throw open the door This combination highlights the inherent challenge of iBuying: it is a relatively low-margin business in the current market.
bottom line: Profitability is not equal to cash flow; companies that are not profitable will not necessarily lose money or face the risk of bankruptcy.
- But it’s a valid metric worth considering when assessing the merits of a particular business model – ultimately, a business need To make money.
- Currently, the most or least profitable firms are traditional brokerages, especially cloud-based ones, while disruptors and technology firms continue to struggle for sustained profitability.
Mike Delprete is strategic advisor Global experts in real estate technology, including iBuyer offer aggregator Zavvie.contact him LinkedIn.
