eXp World Holdings: Trough Earnings, But Expensive
For long-term investors, the key issue here is not whether the business model is interesting, but whether the market backdrop can support the multiple being paid for it. When a companyโs earnings are closely tied to transaction volumes, the investment case becomes highly dependent on rate-sensitive activity rather than on stable recurring demand. That means valuation should be judged against a cycle that may still be turning, not against an idealized recovery scenario.
One useful lens is the gap between operational leverage and timing risk. A lighter cost structure can magnify profit improvement when housing activity rebounds, but it can just as easily magnify weakness when transactions remain subdued. In other words, the same model that helps margins in a normal market can leave earnings highly exposed if affordability stays stretched and inventory remains constrained.
Another point often missed is how quickly consensus estimates can become outdated in cyclical businesses. If forward numbers are repeatedly revised down, a stock can appear cheap on projected earnings while still being expensive relative to the earnings actually available today. For portfolio construction, that distinction matters: a headline forward multiple can mask the risk that โnormalizationโ arrives later than expected.
Finally, short-interest dynamics can distort the path even when the fundamental thesis is cautious. That does not improve the underlying valuation case, but it does change the risk profile for traders and investors. For longer horizons, the more durable question is whether the housing cycle is improving enough to justify paying for recovery before it is visible in the results.
SA
Housing market dynamics are improving but remains poor in the short-term
As Iโve said, EXPI relies on a healthy housing market. And unfortunately, the housing market has been anything but healthy lately. The steep rise in interest rates over the past year and a half has led to an increase in mortgage rates from around 4% at the start of 2022 to over 7% as of today.
Redfin
At the same time, housing unaffordability has reached historical levels. Currently to afford a median house, an annual income of $115,000 is needed. Thatโs more than $40,000 over the median household income in the country. Combined with high rates on mortgages, this means that the monthly payment is simply out of reach for a large number of potential buyers.
Normally, one would assume that real estate prices would adjust downward in such an environment, but due to a low level of inventory in the market, this hasnโt happened and prices have remained largely flat over the past two years. The market remains largely frozen, with transaction activity down significantly, as buyers are not able to afford the monthly payment and many sellers are not motivated to sell, because they donโt want to give up their low-rate mortgage and have to commit to a higher rate mortgage when they buy their next house. This has reduced available inventory substantially.
FRED
Now the question is what will happen going forward. Amongst the primary catalysts that could improve the situation is a drop in the Fed funds rate, which would most likely translate into lower yields and mortgage rates and drive a housing market recovery.
Prior to the Fedโs most recent FOMC meeting, analysts were expecting the first interest rate cut as soon as March. But with inflation plateauing around 3%, above the Fedโs 2% target, and with strong ongoing economic growth of 3.7% in Q4 2023, above the โbelow trendโ growth of 2% that the Fed said would be needed to tame inflation, the Fed has decided to keep interest rates unchanged for longer. Currently, trading activity implies a 53% probability of at least one cut by June and 73% by July which means that we already start to see the light at the end of the tunnel.
CME Fed Watchtool
I donโt know where interest rates will head in the future, but my base case is that interest rates and yields will decline over the course of 2024 which should help the housing market and increase buying and selling activity. I do believe that nationwide the housing market has bottomed.
Long-term performance driven by valuation
If Iโm right about the trajectory of interest rates, then weโve probably seen through earnings for EXPI this year. Though I should also mention that with EPS of just $0.17 in 2023 and negative EPS in Q4 2023, the bar is set exceptionally low. Next year, the general consensus is for EPS of $0.44 in 2024, up 81% from last year. But I also want to point out that a year ago, the consensus for 2024e EPS was double what it is today. And I wonโt even touch on expectations from 2021 which saw EPS reaching $2.00 per share by today.
SA
I like EXPIโs low overhead business model and I do think that the housing market is headed higher in the future. But the problem I have with the stock remains valuation.
Based on 2023 actual earnings the stock trades at 58x earnings and has an EV/EBITDA of 25x. Thatโs expensive. And while using 2024e numbers gives a more reasonable estimate of 22x earnings, Iโm doubtful that EXPI will hit the target as market activity is unlikely to pick up before at least the middle of the year.
EXPI IR
Risks
Iโm fairly bearish on EXPI, but I donโt recommend shorting the stock because of high short interest which increase the risk of a potential short squeeze, like the one we saw in mid-2023 from $12 per share to $24 per share. Since Iโm staying out of the stock, the only risk is that Iโll miss a rally. This could happen if interest rates and consequently mortgage rates decline faster than expected and housing market activity picks up. At the end of the day, however, I do think that the overvaluation risk overweighs this opportunity costs for EXPI. Moreover, I see better way of playing a housing market recovery such as investing in selected apartment REITs.Bottom line
At the end of the day, EXPI is a leveraged bet on housing market activity. I do think that rates are headed lower and buying and selling activity will pick up in the latter half of 2024, but I do not think that it will be enough to hit the 2024e consensus estimate. As a result, I expect forward earnings to be revised downward (again, as they have been almost every quarter since early 2021). I would have been perfectly happy, buying a small speculative position around 20x trough earnings, but at 58x and with a slower than expected recovery, I see the stock as too risky leading me to a SELL ratingEnjoyed this article? Sign up for our newsletter to receive regular insights and stay connected.