Cloud-based real estate brokerage, eXp World Holdings, Inc. (NASDAQ: EXPI) is seeing impressive business growth in the United States, and management plans to do so overseas. In my opinion, eXp has the financial resources to provide an additional increase the number of agents connected to the eXp World platform. In addition, the company also knows how to acquire other peers to acquire more technological know-how or market share. Even factoring in the risks of declining home inventory or declining agent growth, my discounted cash flow models imply further stock price appreciation.
Rapid growth through inorganic growth and agent growth
eXp World Holdings, Inc. operates a cloud-based real estate brokerage that helps other businesses operate remotely among several other services. The business growth of the company is quite impressive. The number of agents grew from 25,000 in 2019 to over 71,000 in 2021. During the same period, revenue also grew from $0.9 billion to over $3 billion with gross margin close to 7.81%. The company seems to offer something that most real estate competitors don’t:
According to a recent presentation, eXp World currently offers 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.
Among the strategies that help eXp World provides exceptional solutions, there is inorganic growth. Note for example that Success was acquired in 2020:
On December 4, 2020, the Company acquired the interests in SUCCESS Enterprises LLC and its related media properties, including SUCCESS print magazine, SUCCESS, SUCCESS® newsletters, podcasts, digital training courses and accounts of social media affiliates on all platforms. Source: 10-K
Additionally, Virbela, LLC, which offered 3D virtual worlds for work, was acquired in 2018. eXp World’s current cloud platform was built using software from Virbela:
In November 2018, eXp World Technologies, LLC acquired substantially all of the assets of Virbela, LLC. Virbela is a technology company specializing in creating 3D virtual worlds for work, education and events. eXp Realty’s current cloud campus, called eXp World, was created using software from Virbela and provides 24/7 access to collaboration tools, training and social communities for agents. real estate and company personnel at our many locations. Source: 10-K
Base case: international expansion, customer acceptance and more agent growth
With know-how acquired in the United States, I believe that eXp World will likely experience overseas business growth. Note that management has already announced plans to evolve the business model by expanding into France, India, Mexico, Portugal and South Africa. In my opinion, if the target market increases, revenue growth will likely increase:
We intend to continue our progress towards more international markets. Through our cloud-based operations and technology platform, we strive to achieve customer-focused efficiency that allows us to increase market share and achieve strong returns as we grow. our activities in the markets in which we operate. In 2020, the Company continued its international expansion in France, India, Mexico, Portugal and South Africa. Source: 10-K
In this case scenario, eXp World’s cloud-based technology strategy will be successful. This means that customers in new territories will accept, understand and use the company’s cloud systems. Also, more and more agents will be interested in singing collaboration deals with World of eXp:
While we believe we have made significant progress in growing revenue and managing our overhead by implementing our cloud-based technology strategy, our services need to be widely accepted by consumers in the marketplace and we need to continue to expand our geographic 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 think future sales growth will likely be in the double digits. We should also add that experts estimate that real estate agency and brokerage services could grow at a CAGR of 9.2% until 2026. In my opinion, eXp World will likely expand beyond the target market of traditional real estate agencies. However, knowing where the traditional competitors stand seems 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: Market analysis of real estate agencies and brokerage
eXp World recorded sales growth of more than 180% in 2018. In 2020, sales growth was close to 100%. With these figures, I think we could expect double-digit sales growth from 2022.
My financial numbers include sales growth between 28% and 24% from 2025 to 2032. My EBITDA margin assumption is between 4% and 7%, and my D&A/Sales ratio is close to 1%.
Given that eXp World will continue to run on the cloud, I think we can use an investment to sales ratio close to 0.3%. My results include a free cash flow margin close to 3-5%, which could be achieved as economies of scale begin to play a relevant role.
If we add future free cash flow from 2023 to 2032 at a discount of 14.63% and use an exit multiple of 7 times 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%.
Agent’s growth rate and home inventory will likely decline, which could send 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 over 71,000. In my opinion, the most significant risk comes from a decrease in the growth of 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 the growth rate of our agents 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 2021 with 1,669 full-time employees. A key part of our operational capabilities is our network of independent real estate agents and brokers, which numbered 71,137 agents as of December 31, 2021. Source: 10-K
It is also quite disturbing to see a decrease in the inventory of houses in some of the eXp World target companies. Without houses for sale, the number of transactions signed by eXp World could decline, which could lead to a decline in the company’s free cash flow. The results in this case would include a decline in the company’s stock price:
Home inventory levels have declined or increased significantly in certain markets and price levels over the past few years. Either way, homeowners are more likely to hold on to their homes for longer periods of time, which negatively impacts home sales volume growth. Insufficient levels of home inventory can lead to reduced housing affordability, which may cause potential buyers to delay entering or re-entering the residential real estate market. Source: 10-K
From 2023 to 2032, I assumed sales growth between -50% and 25%, and a long-term EBITDA margin close to 5%. Finally, with an operating margin of 4%, EBIAT 2032 would stand at nearly 230 million dollars.
In my opinion, once shareholders consider the sales growth depicted in this case, many of them will dump their shares. As a result, I think the cost of equity would definitely go up, and the weighted average cost of capital would go up as well. If we use a 20% haircut and a 5x exit multiple, implied equity would remain close to $1.15 billion. Finally, the fair price would be $7.8.
As of March 31, 2022, eXp World declared $130 million in cash and $116 million in restricted cash. Also, with an asset/liability ratio close to 2x, I think The financial situation of eXp World seems rather healthy.
It is also very advantageous that eXp did not have to go to banks to finance its operations. The company does not declare any financial debt or financial leasing.
With a large sum of money and no debt, I believe that eXp World will be able to hire more employees and train more agents. I also expect overseas agents to appreciate eXp’s cloud technology and help create other network effects. Additionally, if management succeeds in acquiring other technology competitors, further technology innovations will likely facilitate revenue growth. I believe the risks associated with weaker agent growth and declining home inventory could hurt future free cash flow. With this, in my opinion, eXp World could be worth much more on the market.