eXp World Holdings

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

eXp World Holdings, Inc. is a cloud-based real estate brokerage firm, operating primarily through its eXp Realty and Virbela divisions. It aims to provide agents with a technology-driven platform, while also offering ancillary services like marketing, training, and support.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview and Revenue Distribution: eXp World Holdings (EXPI) operates in the real estate sector through a unique cloud-based model. Its primary revenue source is the commissions earned from residential real estate transactions facilitated by its agents. The company operates two main segments:

North American Realty: Primarily generates revenue from residential real estate transactions in the United States and Canada. The company’s North American segment represented 78.8% and 71.3% of total consolidated revenue during the three and nine months ended September 30, 2024.
International Realty: This segment facilitates real estate transactions outside of North America. Primarily generates revenue from residential real estate transactions in 16 different countries with a mix of commission, licensing and referral fees. The Company’s International segment represented 21.2% and 28.7% of the total consolidated revenue during the three and nine months ended September 30, 2024.
Other Affiliated Services: It contains service based activities to agents as well as the delivery of real estate brokerage services to external clients such as relocation and moving and settlement.

Trends in the Real Estate Industry:

The housing market in the US and Canada has seen a slowdown in the 2022 and 2023, with higher interest rates negatively impacting housing affordability.
However, as interest rates level off and inflation pressures cool, home sales are expected to see a recovery and a slight increase in 2024 and beyond.
Home prices have seen steady increases in average prices over the past few years, though some markets experienced declines of as much as 10% in late 2022 and early 2023, affecting volumes.
There’s been a continued growth of new construction inventory in the US, although overall inventory is still low.
Real estate transaction volumes in 2023 remained depressed.
The average US home price at the end of October 2024 was around $420K, down from a peak of $496K in the second quarter of 2022.
Technology is becoming more important in the industry. Online-based real estate exchanges have grown exponentially, and some are very successful. This makes use of AI to facilitate tasks and better match agents with clients.
Global real estate markets are becoming more interconnected, and a presence in key international areas are becoming a requirement.

Competitive Landscape: The real estate brokerage landscape is competitive with many players that vie for agent attraction.

Major traditional real estate brokerages like Realogy and Compass. These often have stronger brand recognition and a physical presence, but may lag behind in technological solutions.
Smaller regional brokerages and independent brokerages: They are often more flexible and specialized but lack the scale of larger players.
Tech-enabled disruptors: Companies like Opendoor and Zillow try to change the process, with more emphasis on home sales.
Other online brokerages: Numerous online brokerages offer commission reductions, but may lack the full support structure that eXp offers.

What Makes eXp Different?

Cloud-Based Model: eXp operates entirely remotely, allowing its agents to work from anywhere, which reduces overhead and can attract agents from all locations.
Agent-Centric Model: The company heavily focuses on empowering its agents, allowing agents the ability to earn both from their own sales commissions and from the sales generated by new agents they recruit into eXp.
Revenue Sharing Program: eXp’s unique revenue-sharing model offers a percentage of commissions generated by downline agents in the organization to the referring agent. In practice, this gives agents a very strong incentive to recruit agents to eXp.
Technology-Driven Platform: eXp has developed a virtual world called Virbela for virtual training and meetings for the agents. This helps to replicate in person interactions that would be hard in a virtual environment. Also other technological tools are deployed for better communication and management.
Global expansion: eXp currently operates in a small number of foreign markets, providing a growth opportunity should they be successful.

Financials:

Revenue Trends: eXp has seen revenue growth during 2020-2022 as many people moved out of cities, and the market heated up. However, growth has slowed down considerably after that.
Margins: eXp is operating on a very good gross margin (7.8% and 7.9% in the three and nine months ended September 30, 2024), yet still operating income is lower (around 1.5%) due to heavy investment in new technology and other operating expenses. Net income is around (2.0%)
Cashflow: eXp is generating a positive cash flow from operations for the first nine months of 2024.
Debt: The company has a low-level of debt with $170.8 million at the end of September 30, 2024.
Equity: Total shareholders equity is at $1.34 billion for the quarter ending Sept 30 2024.
Shareholder Dilution: From the 2023 Annual report we know that the company had around 149 Million common shares, which has increased to 155 Million in the September 30, 2024 quarter, indicating shareholder dilution. The company is also continuing a share repurchase program. It is also issuing stock for acquisition purposes and to agents for their performance, which all increase shareholder dilution.

eXp’s financials show a strong potential, but also with concerns of margin fluctuations due to their technology development programs. While current sales volumes are down, the company has been able to make a better performance than in 2022. The cash position is very good. Dilution of shares continues. The recent reports also noted that the revenue from the high-end markets has dropped, while the middle-end housing market is performing well.

Recent Earnings Call Insights: The most recent earnings calls for 2024 and before show optimism for the future. The company is making a push into international expansion, improving its technology and platform, and is attracting more experienced agents. Also the company has said it is becoming better at cross selling its various businesses, with new agents joining the company. It is also focusing on cost efficiency. Although interest rates continue to have an impact on sales volumes, the company is seeing that demand is coming back as interest rates seem to be stabilizing. Agents are becoming more productive and the company is focused on retaining experienced agents, which can improve their bottom line. Also the company is focusing on improving training for their agents.

Risks and Resilience:

Market Volatility: The real estate market is cyclical and prone to economic fluctuations, which can impact the volume and value of transactions as seen in the past few years. This is the biggest risk factor.
Competition: eXp faces intense competition in the real estate market, which could limit its growth. They try to offset this through their model of offering more to agents and a better opportunity to build a passive income stream.
Technology Costs: Maintaining its technology platform requires substantial investments that might strain profits. The company also faces risk that the technology might become outdated and might not attract new users.
Agent Reliance: As a company that relies heavily on real estate agents, if the real estate sales cycle slows down, this impacts their earnings.
Debt: Although the overall debt profile of the company is low, it has a large amount of lease liabilities and has added more through recent acquisitions. Business Resilience: eXp is highly adaptable and has a low-fixed cost structure that can allow them to weather downturns. Their revenue share model could be attractive to agents that are looking for alternative streams. Also their technological advancements help give them an advantage.

Moat Rating: 2 / 5

Network Effect (Weak): eXp benefits from an agent network; however, that effect is only partially present, since the agents need not be exclusively tied to their specific platform, unlike true network companies.
Customer Switching Costs (Low): Switching costs for agents and clients are fairly low, giving limited pricing power to eXp.
Brand Recognition (Low): eXp does not have strong brand recognition as of yet. It is mostly known within the real estate brokerage community, and not the mainstream general public.
Intangible assets (Low): The company does have some proprietary software and a virtual world, but these can also be replicated by competitors.
Cost Advantages: Low fixed-cost business model. But not really a core advantage due to lack of control on revenue.

Therefore, eXp has a small moat mostly due to the agent network that acts as a sort of referral system. They also have low-costs due to their completely online structure, but they are easily copied.

Understandability: 2 / 5

The business model itself is easy to understand and how their agents make their money.
The nuances in their financial and ownership structure and the way their incentives are designed are not immediately apparent and may require additional analysis.
The various different forms of revenue generation can make it more complicated.

Balance Sheet Health: 3 / 5

The company has low levels of debt and a good level of equity at $1.34 Billion.
The cash flow situation has also improved from 2022 but there are some debt like off-balance lease liabilities that are not immediately visible.
Their continued share buybacks and acquisitions may increase liabilities.
However, their earnings are volatile and can fluctuate, which may impact their future ability to repay debt.