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Is eXp World Holdings a Buy?


Nov 23, 2020 by Deidre Woollard
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The third quarter of 2020 was a record-setting one for residential real estate. With median home prices hitting all-time highs and sales only constrained by the lack of listings, real estate brokerages have been raking in the profits. However, a strong market isn't always the best test of a company's mettle. While eXp World Holdings (NASDAQ: EXPI) has had a phenomenal quarter, are they a bet for long-term success?

Smashing company records

It was a very strong quarter for eXp. Sales were up to $23.6 billion, compared to $11.1 billion in the third quarter of 2019. Net income hit a record of $14.9 million, compared to a loss of $1.8 million during the same period last year. Revenue shot up 100% year over year to a record of $564 million. Cash flow rose 188% year over year to $43.2 million.

Part of what is fueling all that growth is rapid agent recruiting. The company now has 35,877 agents, up 56% year over year. Those agents completed 75,392 transactions, up 95% year over year. Agents at eXp are on an 80/20 commission split until they pay $16,000 to the brokerage for one year. After that has been paid for the year, 100% goes to the agent. This is different from other brokerages that charge a desk fee or take a piece of every sale.

Where it gets really interesting is eXp's revenue-sharing model. An agent can earn 3.5% of each commission for every agent they bring in to the company up until the $16,000 commission cap. They can also earn a smaller percentage from agents who are recruited by the agents they brought in. Aggressive recruiters can build a passive income stream over time. The benefit of all these payouts for eXp is that agents are incentivized to heavily recruit other agents because they won't just earn a one-time payment; they will continue to earn over time. This also aids in agent retention.

Growing technology

As a virtual brokerage, eXp has to focus on online tools perhaps more than most. Its VirBELA platform creates an avatar-driven world where agents can interact with each other, take classes, and ask questions. The company bought the technology in 2018 and also licenses out the platform for conferences, a business that has become suddenly more interesting in this year where in-person conferences became ill-advised. Over 100,000 people used the platform in the third quarter. I was one of them.

I attended a conference inside the platform earlier this year. Not only can you make a virtual version of yourself to interact with others, but you can attend lectures, browse an online expo, and even enjoy activities like boat rides across a virtual lake. The experience takes a bit of getting used to but is surprisingly enjoyable. The next phase of VirBELA is Frame VR, a virtual reality experience designed to be an immersive space for meetings and presentations. Neither of these platforms is a major money-earner at this point for eXp.

In August, eXp also bought Showcase IDX, a real estate technology company with the goal of building a consumer portal. While the business of real estate websites seems to be a bit of a proposition that is past its prime, eXp believes that it can use the technology to develop a portal to compete with the likes of Zillow (NASDAQ: ZG) (NASDAQ: Z) and others.

Plans for the future

Like Zillow, eXp has a nascent iBuying service, Express Offers. The service is a bit different from other iBuyers in that eXp isn't buying homes directly. Instead, a potential seller works with an agent to entertain multiple instant cash offers from several institutional buyers.

It is also expanding rapidly into international markets. It's in Canada, Australia, and the United Kingdom and recently debuted offices in South Africa and India. It next plans to expand into Mexico, Portugal, and France. On the earnings call, CEO Glenn Sanford said these markets represent a 3 million potential pool of agents. The company is expanding into commercial real estate and already has around 1,000 commercial agents. It plans to be in all 50 states by the end of 2020.

Is it a buy?

The company has a goal of reaching 100,000 agents by 2022, which would put it closer to the realm of Realogy (NYSE: RLGY), RE/MAX (NYSE: RMAX), and other large brokerages. While eXp uses some nontraditional methods, it is still in very many ways a traditional brokerage business.

Where eXp is playing catch-up a bit is in the area of related services such as mortgage, title, and escrow. Like others in the industry, it has aspirations to be a one-stop-shop, but it hasn't quite put all the pieces together yet.

The other wild card is VirBELA and whether it can become a revenue stream for the company. On the third-quarter earnings call, CEO Glenn Sanford said, "I think this thing takes off and we can have 200 companies, enterprises spending $50,000 a month on the platform, and I don't think that's unrealistic to think about."

The combination of rapid growth and virtual technology makes eXp an interesting take on a traditional brokerage model. Whether or not it's a buy for you depends on if you think the commission model is solid and if eXp will still be profitable when the market shifts.

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Deidre Woollard owns shares of Realogy Holdings. and Zillow Group (A shares). The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool owns shares of eXp World Holdings. The Motley Fool has a disclosure policy.