A New Play On a Hot Market
By Mon, Oct 12, 2020
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On September 24, the U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced some staggering news…
New residential home sales for August 2020 jumped 43.2% from a year earlier and hit an annual rate of 1 million for the first time in 14 years. In other words, it was the highest level since before the Great Recession in 2008 that saw housing prices collapse.
Anytime we pass previous record highs (especially a high mark before such a life destroying recession like we saw in 2008), folks get nervous. Many believe a housing collapse is imminent.
But I don’t think that’s the case…
Right now, the largest generation in history (the Millennials) at 90 million-plus are finally buying homes. On top of that, mortgage rates are at record lows, and housing inventory is at the lowest level in more than a half-century.
As you can see, we have only 3.3 months’ worth of supply. In other words, if builders stopped building new homes today, we would have zero new homes in just three months.
Of course, low supply/high demand is great news for homebuilders, and they’ve done well since the coronavirus-fueled selloff in March. Two of my favorite homebuilders, NVR, Inc. (NVR) and Lennar (LEN) are up 93% and 175%, respectively, off their March lows.
I think there’s still room to run for homebuilders, but I also have found another way to play the housing boom…
The Real Estate Market Isn’t Attractive for Just Homebuilders
When looking to a buy or sell a home, most folks opt to use a real estate agent. Agents typically make the transaction relatively seamless and are able to help find buyers, sellers, and walk you through the entire process.
As it turns out, as the real estate market has heated back up, the number of real estate agents is also spiking.
After a dip in the number of licensed agents post-Great Recession, we now have a record number of real estate agents across the United States. More than 1.4 million of them, in fact.
And with advancements in technology — along with a Covid-19 booster shot – there’s been a shift in the way real estate agents work. No longer is the big fancy – and expensive — brick-and-mortar office a necessity. Most meetings take place at the house that’s on the market, and most communication and paperwork happen via email and DocuSign (DOCU).
Hello, cloud. Hello, eXp World Holdings (EXPI).
EXPI is a real estate brokerage firm that utilizes cloud-based technology to help agents grow their brokerage without the burden of physical brick and mortar offices and redundant staffing costs.
The Bellingham, Washington-based company has quickly gained steam among real estate agents. That’s because EXPI offers a unique business model that incentivizes agents and brokers.
Here’s how EXPI stacks up against a traditional brokerage firm:
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(Source: EXPI investor presentation)
With EXPI’s cloud-based software, real-estate brokerages and agents can greatly decrease costs, while having the ability to scale their business.
To utilize EXPI’s services, agents pay a one-time $149 setup fee, which includes business cards and folders. Then they pay $85 a month for the cloud brokerage fee. These low startup costs and commitment obligations have led realtors and brokers to rapidly join EXPI.
At the end of 2018, the company had about 15,000 real estate agents onboard. As of August 2020, its agent count had more than doubled to over 32,000. As its agent ranks have swelled, so have sales.
In 2018, EXPI generated $500 million in revenue. Last year it nearly doubled that figure to $980 million, and it’s on pace to end 2020 with more than $1.4 billion in annual sales.
The beauty of a cloud-based subscription model is its low capital-intensive nature. After you build out your software, and outside of occasional updates, your costs remain low. Once it gets to scale, profits quickly follow.
And while EXPI hasn’t produced a profit yet (it’s expected to be profitable this year), the company is already producing positive cash from operations and free cash flow.
Last year EXPI generated $55.2 million in cash flow, a 127% increase over 2018. Through the first half of 2020, it already had produced more than $46 million in cash flow, an 85% improvement over the same period a year earlier.
And while its real estate platform provides the bulk of sales, EXPI is expanding its portfolio to help address the “Zoom fatigue” plaguing many workplaces.
Building Out A Virtual Workplace Platform
In addition to its real estate agent platform, EXPO offers a virtual workplace platform called VirBELA, which it dubs “the future of work.” The platform allows for open collaboration for employees, students, and attendees. It also produces virtual events and conferences across the globe.
Hundreds of global customers utilize this virtual collaboration technology, including Deloitte, Stanford University, and most recently the National Basketball Association.
While VirBELA is still in its infancy (and has yet to contribute to the top line), it provides an added catalyst to the stock, as demand for virtual meetings increases.
Action to Take: EXPI is still a relatively small company ($3.8 billion market cap) that has seen a recent spike in share price. On Monday, EXPI closed at $58.89. Consider buying EXPI on a pullback and begin taking some profits off the table when you’re up more than 25% on your investment.
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About the Author
Jimmy Butts calls himself a reformed Financial Advisor and Asset Manager with multiple securities licenses who provided personalized investment guidance for clients. He's currently the Chief Investment Strategist for two investment-oriented newsletters, Top Stock Advisor and Maximum Profit.
