eXp World: Metaverse And Risks From Lower Home Inventory (NASDAQ:EXPI)

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Cloud-based real estate brokerage, eXp World Holdings, Inc. (NASDAQ:EXPI) is delivering impressive business growth in the United States, and management expects to do it overseas. In my view, eXp does have the financial resources to deliver further increase in the number of agents connected to the eXp World platform. Besides, the company also knows how to acquire other peers to acquire more technological know-how or market share. Even considering risks from lower home inventory or lower agent growth, my discounted cash flow models imply further stock price appreciation.

Rapid Growth Thanks To Inorganic Growth And Agent Growth

eXp World Holdings, Inc. runs a cloud-based real estate brokerage that helps other businesses operate remotely among several other services. The company’s business growth is quite impressive. The agent count increased from 25k in 2019 to more than 71k in 2021. In the same period, revenue also increased from $0.9 billion to more than $3 billion with a gross margin close to 7.81%. The company appears to be offering something that most real estate competitors are not offering:

10-k

10-K

According to a recent presentation, eXp World is currently offering not only real estate brokerage services, but also Virbela and Success. The new solutions offer links to the Metaverse as well as online personal and professional development resources.

Presentation

Presentation

Among the strategies that are helping eXp World deliver outstanding solutions, there is inorganic growth. Notice for instance that Success was acquired in 2020:

On December 4, 2020, the Company acquired the equity ownership interests in SUCCESS Enterprises LLC and its related media properties, including SUCCESS print magazine, SUCCESS, SUCCESS® newsletters, podcasts, digital training courses and affiliated social media accounts across platforms. Source: 10-K

Besides, Virbela, LLC, which offered 3D virtual worlds for work, was acquired in 2018. eXp World’s current cloud platform was designed using Virbela’s software:

In November 2018, eXp World Technologies, LLC acquired substantially all the assets of Virbela, LLC. Virbela is a technology company that specializes in building 3D virtual worlds for work, education, and events. eXp Realty’s current cloud campus—called eXp World—was created using Virbela’s software and provides 24/7 access to collaboration tools, training, and social communities for the company’s real estate agents and staff across our many locations. Source: 10-K

Base Case Scenario: International Expansion, Acceptance from Customers, And More Agent Growth

With know-how acquired in the United States, I believe that eXp World will likely experience business growth overseas. Notice that management already announced that it expects to scale the business model by expanding into France, India, Mexico, Portugal, and South Africa. In my view, if the target market increases, revenue growth will likely increase:

We intend to continue our advancement into more international markets. Through our cloud-based operations and technology platform, we strive to achieve customer-focused efficiencies that allow us to increase market share and attain strong returns as we scale our business within the markets in which we operate. In 2020, the Company continued its international expansion into France, India, Mexico, Portugal and South Africa. Source: 10-K

Under this case scenario, eXp World’s cloud-based technology strategy will be successful. It means that customers in new territories will accept, understand, and use the company’s cloud systems. Besides, more and more agents will be interested in singing collaboration agreements with eXp World:

While we believe that we have made significant progress in revenue growth and managing our overhead by implementing our cloud-based technology strategy, our services must achieve broad market acceptance by consumers, and we must continue to grow our geographical reach, attract more agents and brokers, and increase the volume of our residential real-estate transactions. Source: 10-K

With eXp reporting agent growth of 314%, I believe that future sales growth will likely grow at a double digit. Let’s also add that experts believe that the real estate agency and brokerage services may grow at a CAGR of 9.2% until 2026. In my view, eXp World will likely grow at more than the target market of traditional real estate agencies. However, knowing where traditional competitors stand appears beneficial.

The real estate agency and brokerage services market is expected to reach $1912.99 billion in 2026 at a CAGR of 9.2%. Source: Real Estate Agency and Brokerage Market Analysis

Presentation

Presentation

eXp World reported more than 180% sales growth in 2018. In 2020, sales growth was close to 100%. With these figures, I believe that we could expect double-digit sales growth from 2022.

Ycharts

YCharts

My financial figures include sales growth between 28% and 24% from 2025 to 2032. My EBITDA margin assumption stands between 4% and 7%, and my D&A/Sales ratio is close to 1%.

Arie Investment Management

Arie Investment Management

Given that eXp World will continue to operate on the cloud, I believe that we can use capital expenditures/sales ratio close to 0.3%. My results include a free cash flow margin close to 3-5%, which could be obtained as economies of scale start to play a relevant role.

Arie Investment Management

Arie Investment Management

If we sum future free cash flow from 2023 to 2032 with a discount of 14.63%, and use an exit multiple of 7x EBITDA, the implied equity would be close to $4.18 billion. The implied fair price would be close to $28.1, and the internal rate of return would be close to 9.3%.

Arie Investment Management

Arie Investment Management

The Agent Growth Rate And Home Inventory Will Likely Decline, Which Could Push The Stock Price Down To $7.8 Per Share

In 2021, the company had 1,669 full-time employees, but the number of agents was larger than 71k. In my view, the largest risk comes from a decrease in the growth in the number of agents. Training and hiring a large number of personnel is complicated and expensive. Without new agents, revenue growth will likely decline:

A slowdown in our agent growth rate would have a material adverse effect on revenue growth and could adversely affect our business, results of operations, financial condition, and cash flows.

We ended fiscal year 2021 with 1,669 full-time employees. A key component to our operational capabilities is our independent real estate agent and broker network, which consisted of 71,137 agents as of December 31, 2021. Source: 10-K

It is also quite worrying that there is a decrease in home inventory in some of eXp World’s target companies. Without homes to be sold, the number of deals signed by eXp World could decrease, which may lead to a decrease in the company’s free cash flow. The results in this case would include a decrease in the company’s stock price:

Home inventory levels have been meaningfully declining or increasing in certain markets and price points in recent years. In both instances, homeowners are more likely to retain their homes for longer periods of time resulting in a negative impact on home sale volume growth. Insufficient home inventory levels can cause a reduction in housing affordability, which can result in potential home buyers deferring entry or reentry into the residential real estate market. Source: 10-K

From 2023 to 2032, I assumed sales growth between -50% and 25%, and long term EBITDA margin close to 5%. Finally, with an operating margin of 4%, 2032 EBIAT would stand at close to $230 million.

Arie Investment Management

Arie Investment Management

In my view, once shareholders have a look at the sales growth depicted in this case, many of them would dump shares. As a result, I believe that the cost of equity would certainly increase, and weighted average cost of capital would also increase. If we use a discount of 20% and an exit multiple of 5x, the implied equity would stay close to $1.15 billion. Finally, the fair price would be $7.8.

Arie Investment Management

Arie Investment Management

Balance Sheet

As of March 31, 2022, eXp World reported $130 million in cash and $116 million in restricted cash. Also, with an asset/liability ratio close to 2x, I believe that eXp World’s financial state appears quite healthy.

10-Q

10-Q

It is also quite beneficial that eXp did not have to talk to banks to finance its operations. The company does not report financial debt or financial leases.

10-Q

10-Q

My Conclusion

With a significant amount of cash and no debt, I believe that eXp World will be able to hire more employees as well as train more agents. I would also expect that agents overseas will appreciate eXp’s cloud technology, and will contribute to build further network effects. Besides, if management successfully acquires other technological competitors, further technological innovation will likely facilitate revenue growth. I do believe that risks from lower agent growth and diminishing home inventory could harm future free cash flow. With that, in my view, eXp World could be worth much more in the market.

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