ValueWalk’s fourth Contrarian Investor Virtual Conference is in the books, and one of the presentations during the conference was from researchers at White Diamond Research, who covered eXp World Holdings. They described it as “a bubble about to burst.”
eXp World Holdings surges
White Diamond noted that eXp's stock price has surged more than 400% since mid-May, carrying its market capitalization to $3.3 billion. The company's closest peers are ReMax and Realogy, which have market caps of $630 million and $1.1 billion, respectively. eXp's gross profit last year was $84 million, compared to Realogy's $1.1 billion and ReMax's $210 million.
Carlson Capital's Double Black Diamond Fund posted a return of 3.3% net of fees in August, according to a copy of the fund's letter, which ValueWalk has been able to review. Q3 2021 hedge fund letters, conferences and more Following this performance, for the year to the end of August, the fund has produced a Read More
The White Diamond team said eXp's recent rally was driven by a rapid increase in its agent growth and promotion of Virbela, the company's virtual reality remote meeting program. They praised the company's agent recruiting system but noted some drawbacks, like the generous commission structure, which is good for the agent but bad for the company. Further, the structure is a multi-level marketing structure.
White Diamond researchers said eXp's technology doesn't increase the sales efficiency of its agents. A study conducted by ReMax shows that the company's U.S. transactions per agent are lower than those of most major brokerages.
The company also doesn't spend very much on marketing. Realogy spent $258 million last year, while ReMax spent $72 million. However, eXp spent a mere $3.8 million.
Too much hype over Virbela
White Diamond analysts feel the hype over Virbela is simply too much. eXp has been aggressively promoting its virtual reality communication program since its stock started to rally in mid-May. eXp acquired Virbela in November 2018 for $10.6 million. The company acquired Virbela to use its technology and also to sell the service to other companies.
However, White Diamond notes that Virbela revenues are immaterial to eXp's valuation because they make up less than 1% of total revenue. The firm's analysts note that Virbela is a way to communicate with team members like a virtual reality video game, but it doesn't help sales or take the place of a Zoom call or email.
What is eXp World Holdings really worth?
The White Diamond team noted that shares of eXp World Holdings rallied into the monthly insider selling. Founder and CEO Glenn Sanford owns over $1 billion worth of shares in the company and sold some of those shares this month.
To determine what eXp should be worth, White Diamond assumes that the company will become the largest residential brokerage, surpassing Realogy and that Virbela grows in popularity. At the current growth rate, it will take five to 10 years to reach 320,000 real estate agents, which is the current size of Realogy.
White Diamond questions how eXp can be worth much more than what Realogy is worth today, which is about $1 billion, with future expected dilution. That amounts to only about $15 per share.
Shares of eXp World Holdings declined by as much as 8% after White Diamond's presentation at ValueWalk's Contrarian Investor Virtual Conference.
This article first appeared on ValueWalk Premium.