EXPI - eXp World Holdings: Very Pricey With Minimal Positive Catalysts Other Than A Short Squeeze

2023-11-09 10:42:22 ET

Summary

• eXp World Holdings has a unique business model with lower overhead and scalability, but its high P/E ratio makes it unattractive for investment.
• The company's cash flow performance is tied to the housing market, which has plateaued due to rising interest rates and a slowing market.
• I see no positive catalysts other than a potential short squeeze.

Dear readers,

eXp World Holdings ( EXPI ) is a real estate brokerage with a very interesting business model which allows for significantly lower overhead and faster scalability than virtually all of its peers. Historically, the company has traded like a tech stock, i.e. at a very high P/E ratio, which is the main reason why I wasn't comfortable investing.

I covered the stock in March and issued a SELL rating at a forward P/E of 83x. The stock was trading around $12 back then, but the high P/E ratio didn't stop the price from having a huge run (likely a short-squeeze) to $25 per share. Since then, however, the stock has re-traced all the way back to $13.50 per share.

EXPI's cash flow performance is closely tied to activity in the housing market, which is why today I want to provide my two cents with regards to future prospects of the sector and explain why I'm not investing following Q3 2023 earnings .

EXPI's business model

This is an online cloud-based real estate brokerage, which unlike its peers has no brick-and-mortar stores. As a result, the company can expand globally much faster and enjoys a significantly lower overhead, which enables a higher commission split with real estate agents. EXPI's overhead per transaction averages just $700, compared to Redfins's $4,700. The industry standard is for real estate agents to keep 50-70% of their commission. EXPI pushes this to 90% in addition to interesting revenue share incentives and therefore has an interesting value proposition for real estate agents.

EXPI's earnings are driven by the number of agents and sales per agent. Unfortunately both have plateaued in early 2022 as a result of a rise interest rates and a slowing housing market. Consequently, their EBITDA has been stagnant around $60 Million. Going forward, growth will only be possible if the housing market activity picks up.

The housing market is at a stand-still

Let's talk about the housing market now.

Interest rates are at 5%+ and mortgage rates at 8% for the first time since 2000. This has led to a situation where many existing homeowners are sitting on 3%-5% mortgages and have no desire to sell to have to buy a new property at an 8% interest rate. As a result, inventory is at an all-time low and is down 30-40% from pre-Covid levels.

Low inventory generally leads to higher prices and that's exactly what's been happening. As of August, homebuyers needed annual income of $115,000 to afford a median-priced home. That's over $40,000 over the median household income, making housing truly unaffordable for most Americans and therefore leading to lower transacted volume on the market.

This goes hand-in-hand with affordability relative to renting. The National Rent Index has actually been in negative territory since June, largely as a result of significant volume of new apartments being delivered to the market, therefore increasing competition.

The American housing market is at an interesting point in time. Inventory is extremely low, because nobody wants to get rid of their low-rate mortgage, but no one is buying because prices are simply too high for most and it makes a lot more sense financially to rent. This means low transaction volumes and low commissions for EXPI for as long as the situation persists.

And I expect the situation to persist at least for as long as interest rates and mortgage rates stay high. Once interest rates decrease, housing market activity is likely to come back, though I don't expect to see the very high levels of 2020-2021 anytime soon.

Implications for EXPI

There's no question that EXPI is currently experiencing some headwinds. These have led to 2023 expected EPS of just $0.14 per share which corresponds to a P/E of 95x.

I'd argue that such a P/E is never justified. If you really wanted to buy into the company at this valuation, you'd have to expect significant growth going forward. There are only 3 analysts covering the stock and their forecast calls for growth of 109% next year. Personally I think it's unlikely that this will be achieved, unless the real estate market miraculously booms in 2024. But for the sake of the argument, let's assume that EXPI achieves EPS of $0.30 per share in 2024. That's still a forward P/E of 45x! EXPI is not a real estate company, it is a tech company with its performance ties to the housing market. But these multiples are too high even for tech.

Any way you look at it, you're paying a significant premium here for growth which may or may not come. EXPI is not suitable for value and income investors and I fail to see significant opportunity for growth investors either. As a result, the stock deserves a SELL rating here.

Once again, let me repeat (just as I did last time) that I wouldn't short the stock here. Short interest is currently very high at 25% of float and there could very easily be another short squeeze. I'd stay away from EXPI and if I had shares I would re-allocate into a reasonably priced position with lower risk.

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