eXp World (EXPI): Buy, Sell, or Hold Post Q1 Earnings?

Shareholders of eXp World would probably like to forget the past six months even happened. The stock dropped 43.2% and now trades at $8. This was partly due to its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy eXp World, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think eXp World Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in eXp World. Here are three reasons why you should be careful with EXPI and a stock we'd rather own.

1. Inability to Grow Agents and Brokers Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like eXp World, our preferred volume metric is agents and brokers). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Over the last two years, eXp World failed to grow its agents and brokers, which came in at 81,904 in the latest quarter. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests eXp World might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Breakeven Operating Raises Questions

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

eXp World’s operating margin might fluctuated slightly over the last 12 months but has generally stayed the same. The company broke even over the last two years, inadequate for a consumer discretionary business. Its large expense base and inefficient cost structure were the main culprits behind this performance.

3. Previous Growth Initiatives Have Lost Money

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

eXp World’s five-year average ROIC was negative 24.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Final Judgment

eXp World falls short of our quality standards. After the recent drawdown, the stock trades at 17.6× forward P/E (or $8 per share). At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.

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