As I said in my 2014 writeup on Xpel:
Few companies come around during an investors’ lifetime that have a probable chance of changing one’s life if enough capital is allocated to it. These companies have a rare combination of extremely high economics, are run by high quality, incentivized owner-operators, have defensible characteristics, high consistent growth with potential to continue high growth, and are trading at a fair price.
I know. I’m slow. It’s been 7 years since finding my last high-conviction idea. eXp World Holdings (EXPI) is my next.
No, EXPI is not a microcap company anymore. I looked at it when it was posted on MicroCapClub in 2017 and passed (palm in face). No, it’s not hugely illiquid anymore. It’s market cap is in the $ billions.
None of that matters. I’m an opportunist.
I feel EXPI has that rare combination of great economics, run by high quality, incentivized owner-operators (emphasis on plural), has defensible characteristics, high consistent growth with an absolutely monumental runway for growth. And investors are totally overlooking the opportunity. EXPI is trading for a pittance of where I think it will be in a decade’s time.
The opportunity exists because investors are befuddled. EXPI has grown from 1,500 agents in 2016 to 57,000 agents. It reeks of illegal MLM and pyramid schemes.
EXPI is providing, in real time, a masterclass in the superpower of incentives.
I am betting that EXPI takes the lead in the disruption of the real estate industry. They attract the best agents, align them all to think like owners, and pass the savings to the consumer. The world is unequivocally better off because of EXPI.
Furthermore, you get plenty of optionality. I bet Glenn Sanford and company throw in a few Amazon-AWS-like surprises along the way.
Let me break down my newest high conviction idea.
The current real estate industry has been around for roughly 100 years. Agent commissions are 5-6% on sales. Many people begrudgingly pay the price. But good real estate agent skill is worth a lot.
Real estate brokers traditionally have taken 40-50%, give or take, of the commission split. This is where bloat and redundant costs in agent commissions are found. Brokerages have been brick and mortar establishments where agents have an office, learn and congregate.
Real estate, however, is done in the field. Many agents operate from home. The value of a traditional brokerage has been eroding. Technology is enabling agents to work remotely. The traditional brokerage is not worth as much as it once was.
The best agents already have established books of business. And a majority are paying ~40-50% of their commission to a traditional broker. Few, if any, have any ownership incentive in their broker too.
EXPI comes around and offers this:
- We’ll take 20% of commissions. You get 80%.
- Once you’ve paid $16,000 to EXPI, go ahead and take 100%, you deserve it, just give us $250 per transaction. And after 20 transactions just pay us $75 per transaction.
Oh, wait. Let’s help you build wealth a few more ways while we’re at it:
- Revenue share - bring agents to eXp and you’ll receive a percentage of the company dollar (revenue - paid from eXp’s pocket) from their sales activity. It is based on gross commission income (GCI), and is dynamically calculated and paid monthly.
- Equity - get stock when a) close first sale each year ($200 in stock) , b) sponsored agent closes 1st sale ($400 in stock), c) hit annual cap ($400 in stock) & d) reach ICON status ($16k in stock)
- Take up to 5% of annual earned commissions in eXp stock at 10% discount.
That’s an insane amount of value eXp is giving. No competitors come close to giving this much value and ownership to agents. I mean, what shareholder in their right mind thinks this is good for them? Low margins & dilution is bad, no?
But many great things in life are often unintuitive. Incentives are one.
Superpower of Incentives
Let me step back and talk about incentives. I will explain exactly why EXPI has been growing hand over fist and will continue to do so.
This is very important. We humans have a hard time comprehending how powerful incentives can be. Perhaps the most important job of a company’s leadership team is to get the incentives right and get the hell outta the way.
I’ll invoke Charlie Munger:
I place [Reward & Punishment Superresponse] tendency first in my discussion because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition & behavior.
But this is not often so. I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power.
Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.”
EXPI understands the super power of incentives. EXPI has all of the 6 core attributes that create win-win, additive-sum games.
Other brokers fail horribly. It’s no surprise that those agents are in a dog-eat-dog, zero-sum game. It’s hard to win when everyone is against each other.
The great thing with win-wins is that partners go all-in, the relationships are enduring and competitors DO NOT understand it.
To be truly a great incentive structure, a company needs all of the following:
Simple: Every incentive plan needs to be simple enough that everyone can understand. EXPI checks this box.
- 80% commission. 100% after $16k cap.
- Stock awards for hitting milestones.
- Revenue share for attracting talent. Keller Williams, on the other hand, has profit share. In theory profit share should be good, but is full of smoke and mirrors because of overhead costs that vary from franchise to franchise.
Significant: The incentive needs to move the needle to make it worthwhile. EXPI checks this box.
- Commission split is life-changing from traditional brokers 50% to 20%, and $250 per transaction after cap.
- Hundreds of dollars in stock for reaching attainable goals, and $16k in stock for selling 30-40 houses moves the needle.
- Revenue share - while not listed - is worth enough for agents to attract, retain and motivate sponsored agents.
Timely: The incentive needs to be immediate. EXPI checks this box:
- Better commission split is immediate.
- Stock is immediately given once reaching goals (yet vests over 3yrs).
- Revenue share is given MONTHLY based on fully automated internal system specifically audited by Deloitte.
Certain - Non-gameable by payer: What’s the point of trying if the reward is uncertain. EXPI checks this box.
Certain - Non-gameable by payee: Cheat proof. EXPI checks this box.
- Transactions have to be made for EXPI to pay commission, grant stock awards and pay out revenue share.
- The revenue share pool is entirely made up of eXp’s share of the agent commission pool.
Share the wealth: The reward pool must be earned as a group. EXPI checks this one too.
- Stock provides an opportunity for all agents to think like EXPI owners. Revenue share - paid by EXPI, this is key - means that both the sponsor and sponsored agent win with more transactions.
EXPI isn’t for everyone. This is a good thing. It is geared toward attracting great realtors. Get them to go all-in and you better watch out.
Redfin, on the other hand, is a good competitor doing things wayyyy differently. Instead of hiring self-employed contractors, Redfin agents are salaried employees who are paid a bonus.
The guaranteed payment and bonus structure sounds nice. But by grading it from the 6 characteristics above, it is horrible for the established agent. The compensation plan isn’t simple, it’s opaque. The incentive isn’t significant and definitely doesn’t hit on sharing the wealth.
This is best described with an example:
Agent R (Redfin) & X (eXp) both each sell 25 properties with gross commission income of $20 million ($800,000/transaction). Keep in mind that both charged 1.5% on each sale.
Agent R ends up with $80,000 in salary. This agent pays no expenses. So that is pure “profit” or income. (Actual Redfin agent provided the data)
Agent X, on the other hand, ends up with the following:
- $9,600 per transaction to Agent X & $2,400 to eXp
- Roughly 6 transactions to cap ($16,000)
- $57,600 to agent
- Then $11,750/transaction afterwards (100% - $250/transaction) x 19
- $223,250 to agent
- Total: $280,850 to agent
Now Agent X worked a bit harder, took on more risk and more expenses
- $85/month eXp fee
- $1020 per year
- $149 start up fee
- Pro photographer who does tours/floorplans (Redfin pays for this)
- ~$10,000 (estimated/variable)
- Pay for leads
- $20,000 (estimated/variable)
- Risk management fee $40/trans (caps at $500)
- Broker Review $25/ trans
- $625 for 25
- Real estate license fee
- Total take $247,306 eXp realtor You can lop off an additional $47k for more benefits, office space and more in paying for leads
What would you pick: $200,000 or $80,000 for the same amount of deals?
I didn’t include stock option awards and revenue share for Agent X.
Simply, Redfin attracts newer agents and non-entrepreneurial people. This fills a niche. Yes, some customers prefer non-salesy agents.
Read online forums where Redfin agents congregate and it’s clear: the game plan is often to use Redfin as a stepping stone. Once experience is gathered, the goal is to exit Redfin. All that means to me is future high turnover.
How Can EXPI Give So Much?
Simple. EXPI has centralized administration and no physical offices. It’s all done in a virtual world created by Virbela (now owned by EXPI).
No physical offices and centralized administration cut significant costs. EXPI passes those savings to the agent.
Another contributing factor is agent acquisition cost. Competitors like Compass pay top dollar to sign top producing agents. EXPI pays zero upfront!
Not only is zero capex growth good for EXPI, it’s good for the agent. Getting a windfall of money generally leads to what Bono, singer of U2, called “Moving House”:
You wonder what happened to these great prolific imaginations that lifted you out of your everyday life when you were a kid. They made three great albums and then what the fuck happened? And you discover that they moved house. They suddenly have these walls and they want to hang art on the walls. So they become art experts, and they suddenly become quite discerning when it comes to the Chinese rug. How distracting is all that? I told The Black Crowes that and they thought I was taking the piss (taking liberties at the expense of others, joking). So no Chinese rugs or brass taps when we’re making a U2 album.”
Agent acquisition brings me to my next topic:
EXPI Is Not A Pyramid Scheme or Illegal MLM
According to the FTC, a pyramid scheme “compels individuals who wish to join to make a payment.”
Yes, eXp compels individuals who wish to join to make a $149 start up fee. Afterwards, eXp compels agents to pay $85/ month to use their platform. But does that mean they are a pyramid scheme?
I mean Costco compels individuals who wish to join to make a $60 or $120 payment (which is paid yearly). Is Costco a pyramid scheme?
No. That membership fee subsidizes Costco’s pricing. The fee incentivizes members to be repeat customers. There is value in that payment.
There is value in EXPI’s payment as well. One has access to kvCORE CRM, which normally costs individual agents $300-499/month. Website creation is included. Automated call/text/email is included. And an extraordinary amount of educational content is available 24/7, unlike brick and mortar brokerages.
But accusers then point out that eXp “promises its new members a share of the money taken from every additional member that they recruit”. That is a sure sign this is a pyramid scheme, right?
By itself, no. eXp does promise its members a share of the money generated by each additional member that they recruit. The “down line” goes 7 levels. But the agent has to perform (close sales) to get money to go up stream. That caps at $8k/agent/yr, so exp paying out up to ½ its commission split.
That brings me to my next point: pyramid schemes seldom involve sales of products or services with value.
Real estate agents have been providing a useful service for over 100 years. Home sales is a tricky process. Homes are most people’s biggest asset. The experience is so infrequent for most, that people can’t build the domain expertise to do it themselves. So help IS needed.
The people working for pyramid schemes try to promote the actual company instead of the product they are selling. Sure, there are people in eXp that focus solely on recruiting. But it’s a small fraction. And for anything to happen upstream, real estate transactions with the PUBLIC need to happen.
Think of it like this: a run-of-the-mill pyramid scheme is based on the number of people recruited and sales directly to the RECRUITED. Nothing is sold directly to the agent in EXPI. Money generated is based on transactions of sales with the PUBLIC.
Lastly, the vast majority in a pyramid scheme lose money. With EXPI, that is the opposite. Everyone makes more money than they did with previous brokers almost unanimously because of better splits.
Extremely High Economics
As my friend Matthew of adoY Capital (follow him on Twitter @1_adoy) asks, how many triple digit growers are building net-cash on a fully-diluted per-share basis?
EXPI is. Just look at EXPI’s fully diluted free cash flow/share:
- 2014: $.002
- 2015: $.003 (+50%)
- 2016: $.009 (+200%)
- 2017: $.037 (+311%)
- 2018: $.19 (+413%)
- 2019: $.38 (+100%)
- 2020: $.63 (+65%) ← Includes tons of investment in Virbela & International
Many will point to non-cash stock compensation as a huge number, which inflates free cash flow while being a true expense. That’s true. However, 2020’s results show that EXPI is profitable (>20% ROIC, >30% ROE) despite huge non-cash stock compensation numbers expensed.
And look at EXPI’s share count growth:
- 2014: 103
- 2015: 99 (-4%)
- 2016: 102 (+3%)
- 2017: 106 (+4%)
- 2018: 115 (+8.5%)
- 2019: 126 (+9.5%)
- 2020: 151 (+19.8%)
Compare share count growth with free cash flow growth. Since ‘14, EXPI has grown share count 46%. FCF grew 315x.
Yes, this is real life.
Contrast EXPIs share growth & FCF growth with competitors Zillow, Redfin, Fathom & Real Brokerage.
- Share # growth 2017-2020: 42%
- FCF Growth 2017-2020: 17x
- 2017: 186.5
- 2018: 198 (+6.2%)
- 2019: 208.2 (+5%)
- 2020: 251.5 (+20.8%)
- Total: +34.8%
- FCF Growth over same period: +57%
- 2017: 73.3
- 2018: 85.7 (+16.9%)
- 2019: 91.6 (+6.9%)
- 2020: 98.6 (+7.6%)
- Total: +34.5%
- FCF Growth over same period: -$0.9/share to $.37
- 2018: 8.2
- 2019: 9.8 (+19.5%)
- 2020: 13.9 (+41.8%)
- Total: +69%
- FCF Growth over same period: N/A FCF has been negative
- 2018: 9.1
- 2019: 10.3 (+13.2%)
- 2020: 35.8 (+347)
- Total: +393%
- FCF Growth over same period: N/A FCF has been negative
EXPI’s dilution is either inline with competition or lower! And they’ve blown them out in consistent FCF growth.
EXPI doesn’t need to reinvest tons of cash to grow. Cash is thus being reinvested in growing Virbela which showed its value during the lockdown. EXPI added 180 people to that team. Now Virbela has grown to >300 customers across the globe. This is where I see potential optionality - just like AWS was for Amazon.
Furthermore, cross selling opportunities are present. This has been a huge boon for Xpel as automotive window film has become a low-hanging cross selling opportunity for their PPF installers. EXPI’s low-hanging cross selling opportunity is selling mortgage and title insurance. Margins on this would be much higher. And who knows what other opportunities are available.
One Last Tells Of A Great Business: Abhorred By Competitors
Traditional brick and mortar real estate brokerages HATE eXp. Established agents who were broker’s cash cows are leaving in droves to eXp. Brokers are seeing their businesses decline.
Keller Williams, the model eXp has improved upon, dismissed eXp as competition when they had 1,500 agents 5 years ago. Now eXp has 57,000 agents. Keller is only now trying to replicate eXp’s virtual office for new broker owners.
Dave Ramsey’s coaching company Ramsey Solutions are telling eXp agents to switch brokers or risk losing leads. Ramsey has been known to talk at Re/Max conferences.
The only explanation? The competition is scared.
How To Value EXPI
Few bottlenecks are present to inhibit EXPI’s growth. So I don’t see why they can’t maintain growth at mind bending rates for the next 5 years.
I’ve broken the situation into 3 possibilities 5 years out. All are precisely wrong. At least this exercise gives us an idea of possibilities.
Let’s start looking at EXPI agent revenue per year.
eXp revenue per agent has been growing steadily over the years:
- 2016 - $22,305
- 2017 - $23,975
- 2018 - $32,122
- 2019 - $38,545
- 2020 - $43,528
Here is the worst situation.
Let’s say EXPI’s growth slows for whatever reason. Instead of an extra hot rate of growth it slows to 28% per year. EXPI would reach 200,000 agents 5 years out.
Maybe the market isn’t as hot in 5 years. Assume EXPI revenue per agent declines 20% to $34,822.
Total revenue from 200,000 agents would be ~$7 billion
And EBT margin stays the same (2% - $140 million) with a modest 20x multiple. So EXPI should trade in this scenario at $2.8 billion 5 years out.
Net present value just cut down to $20 per share
EXPI, more likely does better than that.
Maybe EXPI has 300,000 agents worldwide at year 5. That would be a 54% CAGR, still slower than their previous growth rate. To put that number into perspective, that would be 15% of agents in the US. They currently are at 3% and expanding internationally. I think this scenario is more likely than the first.
Imagine, also, that EXPI’s revenue per agent grows at a slower rate (it’s been increasing 14% per year) to $60,000. In this scenario they would generate $18 billion in revenue in year 5. I think $60,000 per agent is possible because the average real estate agent generates $49,000. Including the split that goes to a broker (say 30% extra, on average) would indicate agents, on average, in the US generate ~$64,000 in revenue. EXPI tends to attract the producing agents in the US and internationally so I’d think they could get better than the US average.
Increase EBT margin (to 4%) and EXPI should generate $720 million in EBT. Apply 40x multiple and it should then trade at $29 billion @ year 5. Discount that back to today @ 10% and EXPI should be trading at $124 today (326% upside).
What happens if EXPI knocks it out of the park? Assuming the same numbers as our previous example but with revenue per agent at $70,000 and 400,000 agents we get $193 (500% upside). I think $70,000 is not ridiculous as EXPI gets into mortgage and title insurance.
In estimating my conservative, current valuation of EXPI, let’s assume:
- Scenario A has 40% likelihood = $8
- Scenario B has 50% likelihood = $62
- Scenario C has 10% likelihood = $19
Total it all up and I think EXPI should currently be worth ~$90 a share. From there, as management and the EXPI team executes, the stock should appreciate well above market rates.
I haven’t mentioned it, but there is optionality that Virbela (arguably a “higher” margin business) is a meaningful contributor 5 years out. Or there is a possibility that Virbela is spun out of EXPI in a tax efficient way for shareholders.
The real estate market could go into a recession.
The number of transactions of course in this situation would be lower. The revenue per agent could decrease. But I doubt agent growth halts or declines.
Think about it. As more agents learn about EXPI, why on earth would you take a 50/50 split for a book of business when you could get better? And just think of all of the eXp agents who have less work. Are they just going to sit around?
No. They’re incentivized (revenue share & stock) to start poaching other agents into the eXp umbrella.
I don’t see why people would jump ship because there are fewer deals. Newer, weaker, less experienced agents will get weeded out. But that is true at any time with real estate agents.
I could actually see agent count increase! The strong get stronger in depressions, and EXPI itself was born in 2009 in the rubble/wake of the largest housing downturn/weakest economy in generations.
Most competitors are heavily indebted. Debt is a double edged sword. It’s great for the good times, and can kill you in bad times. EXPI has always had a fortress-like balance sheet.
Another risk is a full EXPI copycat entering the market. Actually there are a few public copycats already: Fathom Realty (FTHM) & Real Brokerage (REAX).
Fathom Realty only costs a low transaction fee ($495/transaction and $99 after hitting cap). That is actually a better split than EXPI. But Fathom has no revenue share. Nor does it have a virtual office. Nor does it own a Virbela. Nor is it run by Glenn Sanford and company.
Fathom is for people doing 10-20 transactions per year, don’t need hand holding, don’t need much support (because they’re not trying to grow), and just want to keep the best split. eXp wants the best realtors who are hungry to grow their business and eXp’s business.
Side-note: Xpel is exactly the same as eXp in regards to their ideal partner. Xpel works on partnering with the best installers who are hungry to grow while the competition is looking for the installers not trying to grow.
Real Brokerage is a full on EXPI copycat. They just give better splits, more stock and revenue share.
Let me tell you why I am not worried about either. First, a copycat implies a business model is good enough to mimic. It’s a form of flattery. But clones that mindlessly emulate have no idea why they are doing what they are doing. The world is highly dynamic. Clones end up making mistake after mistake. The real deal knows the why. And they continue to make correct decisions.
Just think, how many Warren Buffett clones have there been? Tons. And how many of them have succeeded at insurance? How many have succeeded at investing over decades? You get the point.
Glenn Sanford took Keller Williams’ model and made it better. Great artists don’t copy, they steal. They improve on the past. Sanford gets the WHY. And he is painting his own picture. He and his team have compounded gross profits at >100% per year for many years.
A good indicator of execution is share dilution vs. FCF growth. As described earlier, both Fathom and Real Brokerage’s dilution is way higher than EXPI and they both have continued to have negative FCF. Plus, those competitors are largely reliant on outside capital that probably aren’t playing the infinity game alongside Glenn/eXp.
Lastly, there is a network effect in winning. As Ian Cassel’s mentor once told him, “Whether it’s stocks, craps, business, life, people are attracted to winners.” EXPI had a first mover advantage. It has been acquiring more and more of the top realtors in the US. Each top agent that EXPI attracts, the more everyone else sees they are the winner.
iBuying could be much larger than anyone anticipates. I doubt it will take over agents' roles in the industry, however. People crave the help of other people to help with large life transactions. I see iBuying being a niche and potentially one EXPI has a little piece of. It could also be a competitive advantage/differentiator in a downturn because of its off balance sheet.
Wrapping it Up
Henry Ford once said:
In the process of manufacturing I want to distribute the maximum of wage–that is, the maximum of buying power. Since also this makes for a minimum cost and we sell at a minimum profit, we can distribute a product in consonance with buying power. Thus everyone who is connected with us–either as a manager, worker, or purchaser–is the better for our existence. The institution that we have erected is performing a service.
EXPI similarly is performing a service. They distribute maximum wage to agents, which eventually will lead to a minimum of cost to consumers and selling at a minimum profit. Thus, everyone connected with EXPI is better for their existence.
It’s not a pyramid scheme. It is actually harnessing the super power of incentives.
At ~3% penetration rate (of US real estate agents), EXPI has plenty of runway to grow.
EXPI shouldn’t be trading at $38 a share. EXPI should be trading closer to $90 a share today.
From there, I think we’ll be surprised.
Josh Tarasoff recently wrote,
…superlative companies positively surprise. They positively surprise outside observers, and they positively surprise themselves. These surprises come in many forms: invention, excellence, antifragility, longevity, and so forth.”
Xpel was superlative. And EXPI, I believe, is another.
Like all great things in life, they get better with age.
If you enjoyed this, I occasionally send out a newsletter called the WoodShedd.
It won’t contain high conviction stock ideas like above anytime soon.
It will contain:
Digging hard into the mechanics of business, investing & leadership.
Updates on building my business.
Check it out 👇 👇