eXp World’s stock price has taken a beating over the past six months, shedding 29.4% of its value and falling to $10.15 per share. This may have investors wondering how to approach the situation.

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

Even though the stock has become cheaper, we're swiping left on eXp World for now. Here are three reasons why you should be careful with EXPI and a stock we'd rather own.

Why Do We Think eXp World Will Underperform?

Founded in 2009, eXp World (NASDAQ:EXPI) is a real estate company known for its virtual, cloud-based approach to real estate brokerage.

1. Weak Growth in Agents and Brokers Points to Soft 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.

eXp World’s agents and brokers came in at 82,980 in the latest quarter, and over the last two years, averaged 1.5% year-on-year growth. This performance was underwhelming and suggests it 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 an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

eXp World’s operating margin might fluctuated slightly over the last 12 months but has remained more or less 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 10.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

Final Judgment

We see the value of companies helping consumers, but in the case of eXp World, we’re out. Following the recent decline, the stock trades at 13.1× forward price-to-earnings (or $10.15 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a top digital advertising platform riding the creator economy.

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