eXp
the most viral business
By Manuel Maurício
July 16, 2021
Symbol: EXPI (NASDAQ)
Share Price: $33.38
Market Cap: $4.83 Billion
Today I’m bringing you the most viral business I’ve ever encountered. It’s called eXp World Holdings, it’s a real-estate brokerage company, and it’s growing at 115% year over year.
Over this past week I’ve watched countless videos about the company, read a lot about the industry, and I even got to talk with an eXp agent and a lady who owns 10 Remax agencies in Portugal. The first was overly confident on the eXp’s future, the second was overly dismissive.
As is often the case, the “truth” lies somewhere in the middle.
It’s already a cliché amongst investors to paraphrase Charlie Munger’s famous quote “Never, ever, think about something else when you should be thinking about the power of incentives”…
…but Munger couldn’t be more right.
That’s why I got really excited when I read Sean Iddings write-up on eXp. Sean is, not only an investor, but he also owns a real-estate photography company and his wife is a real-estate agent. He knows this space.
I knew right then and there that he had found something special.
He talked about how the incentives were perfectly designed to attract and keep the best realtors (real estate agents). I liked what I read.
This took me on a long journey, which I haven’t yet finished, but I’ll be sharing some of my findings with you today.
Incentives
Glenn Sanford, the founder, CEO, and major shareholder with more than 50% of the company, had been working for Keller Williams prior to 2009 when he decided to open his own joint. Because he had no money to set up fancy offices, he decided to create an online brokerage firm. He started with 24 agents. Today there’s more than 50 thousand.
The typical real-estate deal works something like this:
a buyer will look to sell his home, he will find an agent capable of handling all the commercial and legal stuff, and he will pay the agency a 2.5% commission ( 2.5% on the selling side and 2.5% on the buying side – it can be the same person).
From those 2.5%, 40% or 50% go to the agency to pay for marketing, administrative support and structure and the remaining 50% to 60% go to the agent.
eXp brings some new things to the table. Glenn understood that he could do better and that the interests of both agency and agent should be better aligned.
You see, the best agents, at some point, want a piece of the equity of the agency they’re working for. The typical agency doesn’t offer this. Glenn decided to change things.
HOW GLENN GOT TO ALIGN EVERYONE’S INTERESTS
#1 – Instead of the typical 50/50 or even 60/40 split between agent and agency, eXp offers an 80/20 split with a cap of $16.000.
This means that, after the agent has brought in $16.000 in commissions for the agency, he (or she) will keep 100% of the commissions (there are other fees involved such as software and risk fees, but let’s keep it simple for now).
Right here, this is a massive incentive to switch over to eXp.
#2 – The agents will also be awarded $400 worth of stock when they complete their first deal.
But they’re not entitled to the stock right away since there’s a 3 year vesting period, meaning that they will only get their hands on those shares after 3 years working for eXp.
This is intended to keep them around.
#3 – When an agent reach his cap (the $16K in commissions for eXp), he will also get $400 worth of stock.
But there’s more – The revenue share scheme
#4 – The agents can earn more money by bringing in more agents to eXp.
Yes, it sounds like a pyramid scheme.
It’s a Multi-Level-Marketing scheme, but I don’t believe it to be a pyramid scheme as in a pyramid scheme the collaborators must buy the product to sell to the next guy whereas with eXp, that doesn’t happen. It’s just a referral scheme.
Bear in mind that the money that is paid to existing agents for bringing in new agents comes out of the company’s pocket ( from the 20% that goes to eXp).
If you wish to learn more about this revenue sharing scheme, there’s lots of videos online, but here’s one that is easy to understand.
#5 – The agents will get another $400 worth of stock when the “sponsored” agent closes his first deal. Again, the vesting period is 3 years.
But there’s more:
#6 – The agents can opt for taking 5% of their compensation in eXp stock at a 10% discount to market.
On top of it all, there’s the ICON status that is designed to make agents run after the carrot. When an agent gets the ICON status, only achieved through top performance, he can get the whole $16.000 commission back.
It’s easy to understand why these guys are all over the internet selling the company and not the houses. They can benefit massively from attracting new agents.
That’s what led to the exponential growth in agent count.
A note on a detail that I had heard about before, but only now understood. The revenue stream that’s under you, meaning all the commissions that you’ll earn from other agents that you brought into the company, will be transferable to your children if you die.
It’s my understanding that eXp is the only company doing this and this is a huge allure to agents as it’s a (almost) costless revenue stream.
NET PROMOTING SCORE
Glenn is obsessed with using the Net Promoter Score to fine tune the business. The Net Promoting Score or NPS is like a scale that measures the satisfaction of your clients and collaborators in relation to different aspects of the business.
Glenn has realized that, as long as they keep it above 70, they’ll grow like crazy. If they dip below that level, growth starts to decline.
So whenever they get a lower number in a given section, say the customer’s waiting time to get a phone reply, they’ll tackle it immediately.
eXp World
Given the lack of offices, the company uses its own virtual world (eXp World) as a substitute for headquarters and offices.
It’s just like Roblox or Fortnite. You create your own avatar and you can knock on the door of the HR department, or attend summits, or learn about all the paperwork your client needs to fill to apply for a golden visa…
This virtual world was created by a company named Virbela.
eXp was Virbela’s largest client so the CEO decided to buy Virbela in 2018.
There’s chatter about the company spinning it off, but the CEO mentioned that they haven’t found a tax efficient way to do it yet.
Financials and Operating Metrics
The first and probably most important metric to look at is the growth in agents. I’ve posted it up there, but I’ll post it again here. This number has grown at a staggering 63% rate.
But agents alone isn’t enough. The company might be growing the number of sleepy, unproductive agents that just want to earn money by referring new agents.
But this doesn’t seem to be the case as the total dollar amount that each agent has been responsible for transacting has been on the rise.
This could be happening because house prices in the US have been going up. And yes, they’ve been going up, but not as dramatically.
What’s happening is a combination of closing more transactions…
… at a higher selling price.
Note that those 7.2 transactions per agent are still way below the US average of 10 transactions per agent so, as the company gains market share and its agents become more efficient, we should continue to see exponential growth in revenue.
On the other hand, because there will obviously be many unproductive agents just looking for easy gains with the cascading revenue scheme, eXp might never get there.
On top of that the company is also expanding into other countries like Brasil and Mexico where the housing prices are way below those of the US.
All these factors combined have led to MASSIVE revenue growth of 84% in 2020 and 96% in 2019. On the first quarter of 2021, the growth hit a staggering 115%.
But how does this growth translate into margins and, ultimately, profits?
Well, this is a rather peculiar company that, the more it grows, the lower are its margins.
Think about it. Let’s forget the revenue share and the fees and all that. Let’s just focus on the 80/20 split with a cap of $16.000.
If an agent brings in $50.000 in gross commissions, eXp will get 20% which is $10.000. eXp gross margin will be 20% (10 divided by 50)
But if that agent brings in, say, $200.000, eXp will only get $16.000. Although eXp got more dollars, it’s gross margin went down to 8% (16 divided by 200).
As the agents become more and more efficient, the margins will go down, but the dollar volume will go up. Highly counter-intuitive.
The company has just turned profitable in 2020, and I believe it will keep profitable in the near future…
Balance Sheet and Capital Allocation
eXp has a very strong balance sheet with residual debt and $105 Million in cash.
So what will it do with the cash? This is where I become less enthusiastic.
The management is highly focused on growth, and they say that, if needed, they will sacrifice profitability in order to get growth (yellow flag), although they don’t expect that to happen soon.
The remaining cash will be used to offset the share dilution that occurs when the company compensates its employees with shares.
Now, I’m of the opinion that this is no reason to buy back shares. A company should only buy back shares if it believes they are undervalued, not because it believes that it should have a constant amount of shares.
I understand where they’re coming from. Investors don’t like dilution. And truth be told, the management might believe that its own shares are undervalued…. but I haven’t seen them say that.
Either way, this is something to monitor.
Competition
There are lots of competitors out there.
There are the traditional brick and mortar realtors like Keller Williams or Remax.
There are the hybrids like Redfin and Compass (backed by Softbank).
And there are similar companies such as Fathom and Real Brokerage.
I haven’t done much research on these names, but it’s clear to me that the competitions is increasing and that this industry might enter a race to the bottom.
A lot of these competitors are loss making and will continue to be. Take Compass which is funded by Softbank. Those guys aren’t looking to become profitable anytime soon. Their game is to kill the competition and make their apps and websites a “destination” much like what they’re doing with Uber.
Currently eXp is the best mousetrap. Just look at where it was in 2018…
… and where it was in 2020.
but there’s nothing proprietary to its compensation scheme. There’s no guarantee that there won’t be a better model tomorrow.
By the way, the number one in the charts above is Home Services of America, owned by none other than ol’ Warren Buffett.
I wonder what he thinks about what’s happening in the industry.
Conclusion
There’s much more to talk about. For instance, the company just bought SUCCESS media, the publisher of Success magazine, a publication targeting personal development fans.
Within Success, eXp is also offering those agents who don’t need their physical spaces anymore (because they’ve switched to eXp), the possibility of turning those spaces into co-working spaces.
This isn’t core, but it goes to show that there’s a lot more stuff going on inside eXp. Who knows, maybe one of those things might become a success.
From the conversations I had with agents here in Portugal, eXp will very likely accelerate its growth, not reduce it.
eXp is opening up new countries at a rate of 1 per month, and these agents (at least the Portuguese ones) are in an arms race to “sponsor” Brazilian agents. One of them sent me a picture of him with 22 other participants from Brasil on a Zoom call at 2 AM.
You see, the first few agents in a given country will make A LOT of money from the revenue share scheme. There’s HUGE incentives to grow.
This business model is so new to me and it feels so… so… so cult-like that my spidey sense starts tingling.
If you go to youtube and search for eXp you’ll find dozens of agents promoting the company. These agents say “we” instead of “them”, they feel the company as their own. They organize boat trips and summits under the eXp brand without eXp even knowing about it.
The company just hired Grant Cardone, a famous influencer to be a sort of ambassador. If you watch one of his videos you’ll see people cheering him just for telling yelling at them that if they’re not making $1 million bucks a year, they’re losers.
Is this just a hype or is it an amazing business in its infancy?
I can’t tell yet.
But I can’t dismiss it either.
Here’s what a fellow investor twitted recently:
“Look at what Shopify does for traditional commerce. They give you the infrastructure, you just have to fill in your individual data. The same goes for eXp: It’s the shopify of real estate. Everyone has their showroom but backend is eXp.”
On my O’Reilly write-up last week I said that I was going to research its competition. That will be paused as I’ll keep studying eXp and its competitors in the coming week.
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