The following commentary is an excerpt from the June 18th issue of my short selling newsletter. EXPI is an MLM dressed in drag as competitor to Redfin and Zillow. Regardless, with sales activity in the housing market declining and with nothing in sight that will reverse that trend, the revenue pie for these “digital” realtors is shrinking – fast. You can learn more about my newsletter here: Short Seller’s Journal

I started looking at EXPI as a short in late August 2022 when the stock was trading at $20. It sold down to $10 before I could finish evaluating it. It traded back up to $18 by February 2023 and then quickly sold off back down to $10. It started another levitation up to $15 by late May, then shot up to $21 a week ago Friday when it replaced Heska Corp in the S&P 600 small cap index.

EXPI provides cloud-based residential real estate brokerage services. It boasts that it hosts over 88,000 real estate brokers globally. It has lavish equity award programs, including the ability to receive 5% of commissions in stock at a 10% discount and $400 in stock for each agent recruited to join the company after that agent closes its first transaction. That latter aspect makes it similar to a multi-level marketing operation and thus the operations closely resemble a pyramid scheme. One of the big problems with this model is that stock awards are often dumped into the market as soon as the can be registered. The compensation model is heavily dilutive. As an example, at the end of 2019 the Company had 60.6 million shares outstanding. But by the end Q1 2023 there were 174.5 million shares outstanding.

As you can imagine, revenues grew quickly between 2020 and the end of 2022. Revenues for the full-year 2022 were $4.5 billion. But in Q1 2023 revenues declined by quite a bit, falling to $850 million YoY from $1 billion (a 15% decline). The Company incurred a $1.6mm operating loss vs $4.4 million of net income in Q1 2022. $26mm of SG&A in Q1 was non-cash stock compensation. Thus, the operations generated $56 million in cash but this was down nearly 50% YoY from Q1 2022. In other words, heavy share dilution continues but the actual economics of the business model is deteriorating quickly.

The company’s market cap of $2.93 billion is far too high for a company that is barely producing any operating income. To give you an idea of how quickly the profitability is deteriorating, 81% of its 2022 operating income was generated in Q1. On a trailing 12 month basis, the company generated a small operating loss. Let’s look at the market cap to “cash flow from operations” metric instead. The Company is trading at 20x what might be operating income if it didn’t hand out a heavy dose of stock as compensation. But then again, if it didn’t attract brokers with the allure of stock, it might not have a business to operate. Regardless, a 20x multiple of what tenuously might be regarded as operating income is an insane multiple, especially for a company in a highly cyclical business.

This stock is going to crater back to $10 again. Since getting inserted into the SPX 600 small cap index, volume has dried up precipitously. The MACD is rolling over from its highest level since early November 2021, which is when the housing market and homebuilder stocks rolled over. The RSI suggests the potential for a rapid, steep retrace of the breakaway gap. I think this stock will be back at $10 before the end of August. I started to accumulate July $17.50 puts last week. If the stock doesn’t drop below $17 by the end of next week, I’ll move the position out to August and add to it. I don’t think it’s unreasonable to expect a triple in the August $17.50’s.