eXp World Holdings: Valuation Doesn’t Reflect Macroeconomic Headwinds (NASDAQ:EXPI)

Dear readers/followers,

A lot of my recent analysis has focused on the real estate sector. This is because as a real estate professional with a real estate private equity background, this is where I can provide the most guidance and value to readers. Today I want to start coverage on a different kind of company in the real estate sector – eXp World Holdings (NASDAQ:EXPI).

Overview

EXPI is an online, cloud-based brokerage which attempts to disrupt the traditional way in which real estate agents operate. The company has an interesting value proposition to both investors as well as agents. Its cloud-based model allows for essentially no traditional brick-and-mortar infrastructure which significantly reduces the overhead expense and allows the company to expand globally very fast, since there is no need to set up an office and hire staff locally This allows the company to offer agents a better commission split of over 90% to agents (compared to about 70% in a traditional brokerage) as well as significant added incentives such as revenue shares.

Financials

This asset light, cloud-based model results in significantly lower operating expenses. In particular, EXPI’s average operating expense per transaction stand at just $673 compared to as much as $7,800 for Redfin (that’s 86% lower!).

Just as a traditional brokerage would, the company makes money on commissions. It is therefore crucial that it can grow the number of agents as well as sales of each agents. The company has a solid track record of growing both of these key drivers since 2017 with almost an exponential growth in 2020-2021, which of course was the golden era for real estate. New agent growth has slowed a bit in 2022 as seen by the blue line below flattening but still reached 21% YoY. Revenues have started to decline from the peak in Q2 2022 and total $4.6 Billion for the year (22% higher than the year prior). It is clear that top-line growth was strong in 2022.

The fact that EXPI has been able grow both of their most important metrics in the current tough macroeconomic conditions speaks volumes and actually makes it one of very few brokerages that achieved this. A recession is often what separates winners from losers, take Amazon (AMZN) for example which managed to grow during 2008-2009 and has been on a steep trajectory since. EXPI’s performance in 2022 was significantly better than some of its less profitable and higher leveraged peers, including Redfin Corporation (RDFN) and Opendoor Technologies Inc. (OPEN), this better performance has translated into a lower decline in stock price.

Looking forward the company will likely face extreme headwinds in the short term. With inflation still high and the Federal Reserve determined to bring it down to 2%, it is quite likely that interest rates will remain elevated for a while. That means high rates in mortgages and that means low buyer activity. As of today, the average 30-year fixed mortgage rate stands at 7.06% which makes owning over 2 times more expensive than renting in some areas and frankly unachievable for most Americans.

We’ve already seen a significant slowdown in real estate turnover and it’s likely going to get worse before it gets better. In addition to high rates, we also have a potential recession on the horizon which adds uncertainty for a lot of people. These factors will most definitely lead to some people putting off buying a new home and postponing the decision until the economy improves and rates decline. That’s not a good outlook for EXPI for the next few years and is part of the reason why analysts expect a 50% drop in earning in 2023. Though there are only three analysts that gave estimates, which somewhat reduces the credibility of the number.

Before we get to valuation I want to point out that the company balance sheet is very strong with over $120 Million in cash and no debt. This is a huge plus compared to some of its leveraged peers and could be crucial if/when things get tough because it will allow the company to survive.

Valuation

Valuing EXPI is difficult. A historical comparison to its average P/E ratio makes little sense due to the companies very short history, most of which was affected by the real estate boom in 2020-2021. A comparison to peers such as Redfin or Opendoor is also meaningless because those peers are unprofitable. It is essentially a cloud tech company and the market has valued it as such using extremely high multiples.

There are only three analysts that provide EPS estimates for the stock. The average EPS estimate for next year stand at $0.14 per share (about half of 2022) and is expected to recover to 2022 levels in 2024. At $11.80 per share, the company is trading a forward PE of 84x assuming 2023 EPS and 38x assuming 2024 EPS. On an EV/EBITDA basis the company is trading at 30x.

Really any way you look at it, the valuation is still very stretched at these multiples and assumes very high growth going forward and that’s not really something I think investors should bet on with all the uncertainty we currently have in the economy.

Verdict

EXPI is my favorite publicly traded real estate brokerage. The cloud-based model makes a lot of sense and allows the company to significantly lower its overhead expense as well as operate with no debt at all. This is a significant advantage compared to their competition. It is also a real estate agent friendly model which allows agents to earn higher commissions.

With that said, the market is currently valuing the company at very high multiples, that frankly still feel bubble-like. The macroeconomic outlook is not favorable to residential sales in the short term with interest rates high and a potential recession on the horizon. This means that the company is going to face some of the strongest headwinds since it started. And while I believe that it will survive these difficult times mainly because of its asset light model with no leverage, I cannot justify buying at this valuation. The stock simply seems way overvalued. For this reason, I rate EXPI as a “SELL” here at $11.80 per share.

To be clear, I wouldn’t short the stock here, that could be risky. But if I had it, I would likely sell and reallocate into a different position with a potential upside and significantly lower risk. I’ve covered many such positions in my recent articles.