What happened

Shares of eXp World Holdings (NASDAQ:EXPI) fell as much as 17% in early trading on July 24. Although the stock had gained back some ground by 11 a.m. EDT, it was still off by nearly 13%. There wasn't any material news out of the company, but investors appear to have at least temporarily soured on the investment theme that's pushed eXp World Holdings' stock up by well over 100% in just three months.   

So what

This is a unique company in a very important way. On the surface it's a real estate company, providing services to real estate brokers. However, it does this via the cloud, providing a "virtual office." So it's also something of a technology company. To be fair, it has been growing rather quickly, with trailing 12-month revenue more than doubling in the first quarter, year over year. But it is still bleeding red ink, posting a trailing 12-month loss in the first quarter. Yes, the decline wasn't as bad as the same period in the previous year, but this is not a highly profitable company. Investors bidding the stock up are betting that it will become profitable in the future.  

Three people in front of a house with a for sale sign on the lawn

Image source: Getty Images.

That bet is the key here, since it appears to be tied into the work-from-home story that has taken hold on investor emotions of late -- eXp World Holdings is hardly the only stock that has been bid up sharply on this theme. However, today, it looks like investors are taking a step back after material gains, a fact that's hit more than just this company's shares. This could simply be investors taking some profits off the table, or something bigger. There's no way to tell at this point. The key takeaway, however, is that trading in eXp World appears to be driven by investor sentiment right now and does not necessarily reflect the underlying fundamentals of the business. For example, U.S. home sales recovered dramatically in June from depressed levels, but overall they're still being hampered by the impact of the coronavirus.

Now what

With COVID-19 still causing major life disruptions, long-term investors need to think extra carefully about the stocks they choose to own. This isn't to suggest that eXp World Holdings is either a good or bad company, but it is to say that it's one that has been caught up in the work-from-home zeitgeist that's taken hold in the business and investment landscape. With history as a guide, Wall Street has a bad habit of taking things too far when it gets a story it likes. If you are looking at or own eXp World, take the time to dig into the details and make sure this is really a company of which you want to be a part owner. And regardless of the answer, you should expect volatility here to continue ... and it could just as easily be to the downside as the upside.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.