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Cloud Real Estate Brokerage, eXp World Holdings, Inc. (NASDAQ:EXPI) is delivering impressive business growth in the United States, and management expects to do so overseas. From my point of view, eXp has the financial resources to grow further by the number of agents connected to the eXp World platform. In addition, the company also knows how to acquire other colleagues to gain more technological know-how or market share. Even taking into account the risks associated with reduced inventory at home or reduced growth of agents, my discounted cash flow models imply a further increase in the stock price.

Rapid growth due to inorganic and agent growth

eXp World Holdings, Inc. operates a cloud-based real estate brokerage company that helps other businesses operate remotely among several other services. The company’s business growth is impressive. The number of agents has increased from 25,000 in 2019 to over 71,000 in 2021. During the same period, revenue also increased from $0.9 billion to over $3 billion, with a gross margin of about 7.81%. Company appears offer something that most competitors in the real estate industry do not offer:

10-to

10-K

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

Presentation

Presentation

Among the strategies that help eXp World delivers outstanding solutions, inorganic growth. Note, for example, that Success was acquired in 2020:

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

In addition, in 2018, Virbela LLC was acquired, which offered virtual 3D worlds for work. The current eXp World cloud platform was developed using Virbela software:

In November 2018, eXp World Technologies, LLC acquired virtually 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 built using Virbela software and provides 24/7 access to collaboration tools, training, and social communities for real estate agents and employees across many of our locations. Source: 10-K

Base case: international expansion, recognition from customers and further development of agents

With the know-how gained in the United States, I believe that eXp World is likely to grow overseas. Please note that management has already announced its intention to scale the business model through expansion into France, India, Mexico, Portugal and South Africa. In my opinion, if the target market increases, revenue growth is likely to increase:

We intend to continue our expansion into other international markets. Through our cloud-based operating and technology platform, we strive to achieve customer-centric efficiency, which allows us to increase market share and generate high profits as we expand our business in the markets in which we operate. In 2020, the Company continued its international expansion to France, India, Mexico, Portugal and South Africa. Source: 10-K

In this case, the script eXp World’s cloud strategy will be successful. This means that customers in new territories will accept, understand and use the company’s cloud systems. In addition, more and more agents will be interested in signing cooperation agreements with Expert World:

While we believe we have made significant progress in revenue growth and overhead management through the implementation of our cloud technology strategy, our services must be widely accepted by consumers in the market, and we must continue to expand our geographic presence, attract more agents and brokers. , as well as increase the volume of transactions with residential real estate. Source: 10-K

FROM experience report agent growth 314%, I believe future sales growth is likely to be double-digit. We also add that experts believe that real estate agencies and brokerage services can grow by an average of 9.2% until 2026. In my opinion, eXp World is likely to grow beyond the target market of traditional real estate agencies. However, knowing the position of traditional competitors is useful.

The real estate agency and brokerage 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 services

Presentation

Presentation

eXp World reported sales growth of over 180% in 2018. In 2020, sales growth was close to 100%. I believe with these numbers we can expect double digit sales growth from 2022.

Ydiagrams

YCharts

My financials include sales growth of 28% to 24% from 2025 to 2032. My EBITDA margin assumption is between 4% and 7% and the D&A/Sales ratio is close to 1%.

Arie Investment Management

Arie Investment Management

On condition eXp World will continue to operate in the cloud, I believe we can use a CAPEX to sales ratio close to 0.3%. My results include free cash flow margins close to 3-5%, which can be realized when economies of scale start to play a significant role.

Arie Investment Management

Arie Investment Management

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

Arie Investment Management

Arie Investment Management

The agent’s growth rate and housing inventory are likely to slow down, which could push the share price down to $7.8 per share.

In 2021, the company had 1,669 full-time employees and over 71,000 agents. In my opinion, the biggest risk is associated with a decrease in the growth of the number of agents. Training and hiring large numbers of staff is difficult and expensive. Without new agents, revenue growth is likely to decline:

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

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

It is also very disturbing that in some Target companies eXp World. Without houses to be sold, the number of deals signed eXp World could decline, which could lead to a decrease in the company’s free cash flow. The results in this case would include a decrease in the price of the company’s shares:

In recent years, the level of home inventory has significantly decreased or increased in certain markets and in certain price categories. In both cases, homeowners are more likely to keep their homes for longer periods of time, which will negatively impact home sales growth. Insufficient levels of housing inventory can lead to a decrease in housing affordability, which may cause potential homebuyers to delay or re-enter the residential real estate market. Source: 10-K

I assume that from 2023 to 2032 sales growth will be -50% to 25%, and the long-term EBITDA margin will be close to 5%. Finally, with an operating margin of 4%, EBIAT by 2032 will be about $230 million.

Arie Investment Management

Arie Investment Management

In my opinion, once shareholders see the increase in sales depicted in this case, many of them will dump their shares. As a result, I believe that the cost of equity will certainly increase, and the weighted average cost of capital will also increase. If we use a 20% discount and a 5x exit factor, the implied capital remains close to $1.15 billion. Finally, the fair price will be $7.8.

Arie Investment Management

Arie Investment Management

Balance sheet

As of March 31, 2022 World of experience informed $130 million in cash and $116 million in restricted funds. Also, with an asset-liability ratio close to 2x, I believe that eXp World’s financial condition looks quite healthy.

10-Q

10-Q

It is also very advantageous that eXp didn’t have to talk to banks to finance its operations. The Company does not report financial debt or finance leases.

10-Q

10-Q

My conclusion

Having a significant amount of cash and not having debts, I believe that eXp World will be able to hire more employees as well as train more agents. I also expect overseas agents to appreciate the eXp cloud technology and contribute to the creation of additional network effects. Also, if management successfully acquires other technology competitors, further technology innovation is likely to drive revenue growth. I do believe that the risks associated with lower agent growth and reduced home inventory could be detrimental to future free cash flow. At the same time, in my opinion, eXp World can cost much more in the market.

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