Description

eXp World Holdings

Company Description

eXp World Holdings is a virtual real estate brokerage. In contrast to traditional brick-and-mortar brokerages that have physical office locations, eXp has no physical presence. Instead, it operates through a virtual model whereby its agents are able to interact via avatar in through a digital portal. Physical presence aside, eXp provides its agents with many of the same benefits that you would expect from a traditional brokerage such as tech and back-office support (e.g. CRM, website, digital campaigns) in addition to business coaching and training.

Business Model

In the US, a home seller typically pays 5-6% of the price of the transaction in real estate commissions with the typical commission split 50/50 between the buyside and sellside agent. The agents typically keep 70-80% of the commission and share the remainder with the brokerage in exchange for the branding, support and training that the brokerage provides.

eXp has a commission model that it believes is favorable to its agents. Agents keep 80% of the commissions up through the first $80,000 in gross commissions and thereafter, keep 100% of the commissions generated. Note however that eXp does charge a series of fees and dues including a technology access fee ($50-$500 / month), a transaction fee ($250-$500/transaction), errors and omissions insurance fee ($30-$50/transaction) and a broker review fee ($25-$100/transaction) and an annual education fee ($420/year).

eXp’s business is thus dependent on i) the number of agents that it is able to recruit and ii) the productivity of those agents. eXp has historically been successful in recruiting agents through equity incentives. When an existing agent recruits a new agent to the platform, the existing agent receives 250 shares of EXPI stock (worth ~$2,500 at today’s prices) when that new agent closes his/her first deal. This is meaningful given the median salary for a real estate agent per the BLS is $44,000 (range of ~$110k on the high end and <$25k on the low end). EXPI agents are also eligible to take some of their commission and award payment in the form of stock.

Looking at the agent growth over time, this mechanism has worked well with total agents growing from ~1,000 in 1Q16 to over 12,000 today. There are approximately 2 million active real estate licenses according to the NAR and it is reasonable to assume that at least half of those licenses are active, thus there is still ample runway for agent growth.

Financial Performance and Business Economics

The company recognizes the full buyside or sellside commission as revenues to the company and considers the agent’s percentage of that commission as COGS. Because agents get 80-100% of the commission, the gross profit to eXp is remarkably thin. Gross margins have been trending down from 15% in 2015 to 11% in 2017. This indicates that many of eXp’s agents are highly productive and have eclipsed the $80k commission threshold whereby eXp doesn’t share in any of the commissions above that threshold.

Looking at overall agent stats, the average revenue per agent is still pretty low. Taking the total revenues for the year and dividing it by the average number of agents, the average agent is producing <$35k in commissions. Given the gross margin pressure identified above, that means that the bulk of the revenues are being produced by a small cohort of high-performing agents and that most of the agents are rather unproductive. This is not a very compelling mix since i) unproductive agents aren’t going to generate a lot of revenues to EXPI and ii) because of the $80k commission threshold, EXPI doesn’t participate in the upside from its most productive agents.

The economics are further strained because EXPI offers dilutive stock to its agents, who on balance, we see are not very productive. Newly referred agents result in a grant of 250 shares and as we see in the prior exhibit, stock-based-comp was $11mm in 2017, rising from $5mm in the year prior. Because agents only generate ~$30k in annual commissions, it is likely that many agents liquidate shares in order to generate additional living income, putting pressure on the stock price. Note that as the stock price continues its decline (see below), there is less incentive for existing agents to refer other real estate professionals to the platform, potentially slowing agent growth and thus slowing revenue growth.

Valuation Discrepancy

EXPI’s valuation is highly stretched if you look at the stock on a fundamental basis. The valuation discrepancy exists because:

1. There aren’t many similar companies to EXPI thus the valuation framework is still in flux. The William Blair analyst that covers this stock originally pointed to an 8-19x EBITDA multiple in a July 2017 initiating coverage report, referencing traditional real estate organizations such as Realogy and RE/MAX. The same analyst, in May 2018, points to a revenue and gross profit multiple and uses tech-enabled broker Redfin as a comp. Note that the analyst does not have a price target on the stock.

2. EXPI is a stock that was recently uplisted from the OTC to the NASDAQ and thus never received much investor attention. Since listing on the NASDAQ on May 21, 2018, the stock has fallen from ~$17 to ~$12 / share, but there is ample room for further correction.

High-growth companies are typically valued on a revenue multiple because profits are re-invested back into the company, thus there are no cash-flows to base a valuation off of. The issue with EXPI is that it is inherently a thinly profitable company as evidenced by ~10% gross profit margins.

As a proxy, high-growth SaaS companies typically have +70% gross margins and over the last 10 years, have traded at an average of 4.5x LTM sales. In recent times, LTM multiples have floated up to ~10x revenues given the rise of the market and the outperformance of tech. This framework should serve as an upper bound for valuation purposes since SaaS revenues are recurring subscription revenues. Applying a SaaS valuation framework to eXp, we see that the company is trading at a +50% premium to this benchmark.

As EXPI receives more investor scrutiny, its stock price should gravitate towards a more realistic valuation. The business generates very thin margins and the issuance of EXPI shares to unproductive real estate agents generates selling pressure which should cause the stock to continue its decline.

Risks

• EXPI is a thinly traded stock with average volume of 60k shares. Modest buying activity could levitate the stock

• Company may find a way to accretively recruit productive agents to its roster, generating revenue growth and profitability

Catalyst

Continued scrutiny by the investor community given recent NASDAQ listing. Decline in stock price is a self-fulfilling cycle as a lower stock price discourages agent referral, slowing agent recruitment and leading to reductions in revenues.