Chit Chat Stocks - The Real Brokerage: The Fastest Growing Company We've EVER Covered On The Podcast (Ticker: REAX)

Episode Date: June 18, 2025

In this episode of Chit Chat Stocks, Brett dives into a research report on a small stock with a market cap below $1 billion: The Real Brokerage (Ticker: REAX). It has grown its revenue by 100x in the last six years, making it the fastest-growing company we've ever researched. We discuss: (00:00) Introduction to [X company] (04:01) Understanding Traditional Real Estate Commissions (07:33) The Disruptive Business Model of [X company] (13:39) Exploring Ancillary Services and Their Potential (23:45) Innovations in financial services (34:14) Real Estate Brokerage Insights (39:07) Competitive Landscape in Real Estate (43:44) Understanding the MLM Debate (48:23) Management and Leadership Evaluation (49:52) Valuation and Future Earnings Potential (57:58) Final Thoughts and Investment Decisions ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* Fiscal.ai is building the future of financial data. With custom charts, AI-generated research reports, and endless analytical tools, you can get up to speed on any stock around the globe. All for a reasonable price.  Use our LINK and get 15% off any premium plan: ⁠https://fiscal.ai/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode.

Welcome to Chitchat Stocks. I am one of your hosts, Ryan Henderson, and I am joined as always by Brett Schaefer. Today, we have one of our monthly research reports. We are talking about The Real Brokerage. This is, I believe, the fastest growing company in the real estate market. They have 100x revenue over the last five years, if I'm not mistaken, Brett? That is correct. $10 million. Well, it might have been six. $10 million in revenue in 2018, essentially nothing when we talk about their unit economics, to over $1 billion over the last 12 months. Honestly, closer to $1.5 billion. So well over 100x in revenue. We're going to to discuss that and more on today's episode, I should say I was trying to figure out where I

even found this company. And I looked on Value Investors Club. There was nothing. I looked on our old sponsor, Yellow Brick Investing. There was nothing. And we, before this episode, did a little digging. And it was an audience question on an old investing power hour. So that's a shout out to our community here for bringing up some very interesting stocks. And we're going to talk about one of the, you know, this fast growing business, whether I'm going to buy some shares, what the model looks like, and then, you know, if it's a promising stock and I'm excited to do it. Yeah.

A little teaser here. This looks like a truly disruptive business and one that has gained legitimate traction. Sometimes you see fast growth and you kind of wonder what's really under the hood. It seems like this is being powered by true business model growth. And we're going to talk about all that and more. But before we do, I want to ask if you enjoy these episodes, if you like our research, if you like the Chit Chat Stocks podcast, please review our show on Apple or Spotify. Five stars would be greatly appreciated. That's really the number one way to help this show grow. And then as a follow-up, we drop these research reports on our Chitchat Stocks sub-stack for free. So if you want any of the charts, numbers that are in this research report, you can get all of those over on our sub-stack. So go ahead and check that out as well. But let's get into things.

Brett, before we talk about the real brokerage and their potentially disruptive model, let's go through, I guess we can call it the traditional model, legacy model. How do real estate commissions work today? Right. Yeah. So the best way to begin our analysis of the real brokerage, we're going to be saying the word real a lot today, real estate, real brokerage, real estate commissions. But the best way to do that is to look at how the residential real estate industry operates. Typically, a licensed real estate agent will join a branded brokerage, such as one that's big in my state, Windermere. I don't know if they're in any other states,

but it's just a large brand in the state I reside. Agents make money by taking a commission that most people are well aware of, of every real estate deal they close. Commissions are usually 6% of the final value of the transaction split evenly between the buyer and seller agents. And for a home that sells, say, for a million dollars,

30,000 will go to the buyer's agent and 30,000 will go to the seller's agent. That's not bad. If you ask me, it seems like, and we'll talk about this later, fees have a chance to come down with the rise of the digital brokers and the lawsuit that came in, which we're not going to discuss in detail, but basically enabled fees to be more variable depending on supply and demand. However, when we look at these fees, agents don't keep it all. They have to share part of these commissions with, say, Windermere, the brokers that they represent. Exact details of these commission splits are kept under wraps, and I'm sure not

everyone has the same. But from what I read, for example, on this Windermere one, I'm assuming it's similar across other brokerages, the split typically starts at 50-50 and work up to a better 80-20 split if the agent is successful, along with other fees paid in the process. I'm sure startup fees, blah, blah, blah, stuff like that. This means that agents are giving upwards of $15,000 of the $30,000 commission they get with a million-dollar home to the brokerage they work with. Now, you might be asking, why do the agents work with a brokerage brand such as Windermere and sacrifice so much profit? Well, for one, they are required by law to use a broker. They have to use one in order to operate. Two, a company such as Windermere will tout its brand status along

with the mentorship from its community and other agents. The agents need Windermere because sellers only want a trusted brand. You know, you see that sign that's recognizable in front of a property, and then Windermere needs its agents in order to close deals. It's a symbiotic relationship where both stakeholders succeed, or that is really as the story went historically. Now, as you may be guessing, as I'm leading into here, today we are discussing perhaps the next chapter in the story where real estate internet portals, smartphones, and digitization have changed the home buying process, which has enabled potential disruption and pricing pressure across the brokerage industry. That disruption is now being led by the real brokerage, among some others that

we'll talk about later. Its revenue was a measly $8.4 million in 2018. And over the last 12 months, it has grown to $1.4 billion, a 127% compound annual growth rate. I think this makes it at least over a five year plus period, the fastest growing company we've ever covered on Chitchat Stocks. And let's get into it, Ryan. Anything before we move on to the next section and discuss this business, how it works and its financials. It's worth mentioning, and you're going to talk about this in a second, that revenue is not the most important figure for this business. And however, the growth as you trickle down the income statement is similar. So if you're using gross profit as sort of the indicator, you've seen similar growth as well.

So you might imagine $1.4 billion, huge market cap potentially, or large company, especially at this growth rate. I'll go ahead and just spoil it here. Not too large of a market cap. This is not – I would say the cat is not quite out of the bag on this one. So there is still some work to be done on the valuation, but let's talk about the business model first. How does the real brokerage business model work and why is it disrupting the traditional model? Okay, let's compare it to some other businesses out there. You have some companies like Charles Schwab or Robinhood that have used the internet digitization software

to drive down costs on stock trade. Stock trades, honestly, costs went to close to zero. It's a lot different than the real estate market. You had online banks out there such as SoFi, Ally Financial that have lower overhead costs without physical bank branches that enable them to offer higher interest rates to customers. Now, the real brokerage is aiming to do the same for real estate agents. They're aiming to use software and the internet and all these digital tools to give them more of the profits back to them while still maintaining a solid business model. And this company is what's known as a cloud brokerage. Instead of going into an office and working with a legacy player such as Windermere, agents that work with the real

brokerage simply use its software to manage their business and process transactions for clients. Now, there are a few reasons why an agent would want to switch to the real brokerage over a traditional office-based brokerage, at least from what I was reading. I mean, you know, real estate agents. There's a ton of discussions online. I mean, there's an endless amount of what called forums, chats, all that stuff that you can go read yourself. So first you have the software and ease of use. Real brokerage gives you the independence. When operating as a real estate agent, you can build your own brand and even private label real brokerage software instead of getting overshadowed by the traditional brokerage brand. Real will even

send you your own physical advertising set for properties. And the software is modern, can be operated from on the go from a smartphone and is getting better by the quarter as real invest more on the technology development, which we'll get into the ancillary services and the whole supply chain in, I think, the next section. Then the main point of differentiation is the commission split offer to agents who use the real brokerage. Instead of 50-50 or 70-30, all agents start at an 85-15 split, which is highly disruptive. From there, they can earn even more bonuses through customer referrals, where if you bring in a new agent, you get some of the reals commission income from that new agent. Now, once an agent hits $12,000 in commission

income, the agent earns 100% of the commission and they have zero split to the real brokerage, excluding a transaction fee that I assume is there just to make sure that gross margin don't go negative on a transaction from whatever fees the real brokerage has to use when processing a transaction. Plus, agents are enticed with a stock purchase plan for real brokerage stock and stock awards that both align stakeholders together. Shareholders management and the agents would both like the real brokerage stock to go up, which I think is a good thing as a prospective shareholder. Now, what do the agents give up by switching to the real brokerage? In general, I believe maybe the community of the legacy brokerage, its relationships with

existing clients. You know, hey, you were someone who bought a home in the past with this legacy brand. You trust them. It was a good process. Hey, we'll go back to them in the future and we'll go back to an agent who works with them. You know, they're trusted entities, at least the well-run ones, such as someone like Windermere, who has a long standing brand and good market share in their regions. But I think in the internet age, the upside of switching to the real brokerage or a cloud-based brokerage greatly outweighs the downside. This is especially true for an established real estate agent. From the blogs and forums I was reading in this further research, real brokerage may not be useful for an agent that just got its license because, well, you know,

you're starting at square one. You need that help and that community and, you know, the mentorship, which the real brokerage does provide, but it's a lot different than working in a physical office agent or an established team of agents, it can allow them to take home tens of thousands of more in income a year, maybe even hundreds of thousands if you're a full team in commission income with, I think, minimal downsides. And the numbers speak for themselves. We talked about that revenue growth. There's a reason that revenue has gone to $1.4 billion from close to zero a few years ago. gross profit has gone from virtually zero to $128 million. So look at that gross margin, it's just below 10%. And that's because look, they, when they talk about accounting,

that's the full commission. And when they're giving up 85% or more of that to the real estate agents, well, the gross margin is going to be low, but that doesn't mean that it's a bad business. Auburn income has remained slightly negative, but has moved in the right direction. I think We'll talk more on that later. And for context for the listeners, as of this recording, I made these notes on June 12th. So just as a reference, when this episode comes out, the market cap today is $858 million. So price to gross profit, not too aggressive, especially given the growth rate. And we're going to try to talk through for the rest of this episode. Well, is the real brokerage going to continue growing its gross profit at an aggressive rate? Will it get to better operating

income? Will it get to positive operating income and see an earnings inflection here? And why or why not would that happen? Because if you believe this growth is going to continue in both revenue, gross profit, and then an earnings inflection from slightly negative to positive, well, the stock probably works over the next few years. Yeah. And just to rehash some of that. So So if you're an agent who is able to generate a lot of their own clients and you know what you're doing, maybe you have already built up sort of a book of business over the years, those are the ones where moving to real brokerage, for example, is potentially a lot more appealing because you don't need as much support, but there's an obvious lift in your take-home earnings as the broker. So that I imagine is kind of their target or core agent that they go after. And you mentioned market cap of under $58 million, $128 million in gross profit over the last 12 months. Just to put a number on it, it comes out to just under seven times market cap to gross profit multiple. Yep. And it could come down to three, two, or even one in a few years if this growth rate continues, which is why I think the biggest question is, well, are we going to see?

Is the growth going to continue or are they going to hit a wall in market share? Is the business model sustainable? And that's what we're going to discuss in these future sections. Yeah, I think the core of that model is really quite disruptive. None of these businesses, because there are some that are similar to this. None of them are going to be winner-take-all. I imagine the digital brokers or the cloud brokers are going to be probably fragmented. You're not going to have regionalization like you do with the traditional models, but there'll be certain appeals to certain types of agents all throughout the internet. So it's probably going to have fragmented market share for some time. And just to go back to that model of the commission split, it's similar a bit to financial advisor houses.

So maybe some of the people that are listening to this are in the advisory space. You'll know what I'm talking about here, where let's say you are an independent advisor or you are a financial advisor under, say, the Wells Fargo branch, for example. Your commissions that you get from your clients, you're going to pay for some services to Wells Fargo, but you're also going to pay the first chunk. It's not exactly the same split, but you'll pay, call it up to a certain amount. Let's say it's $1,500 each month in that first part of commission revenue that you get is going to go to the parent advisory house, or in this case, it would be the brokerage house. And then you gain it from there. So it's basically giving some margin of safety to the real brokerage and covering some of their fixed costs for each agent that they onboard. Let's talk about some of the other services though because it's not just a pure we're the lower-priced offering thesis here. There's some ancillary services. Why don't you go through them and I guess talk about what you think has the most promise? Yeah, these ancillary services I should say are in the very early stages.

So it's more the potential of what they can build as a comprehensive offering. I would look first at, for context, like there's a lot of real estate disruptor names out there. They all say the same thing. The real estate industry is antiquated and broken. And real brokerage says the same. And a lot of people believe there's ways to improve on the model where, again, if you look at the home buying process and all the fees across this versus the stock buying process, it's just wildly different. And there's just so much bloat within in the industry. But instead of trying to fully disrupt the traditional model, like a Redfin or even with the iBuyers such as Opendoor, rest in peace, real brokerage wants to use the internet

and digital tools to make existing agents and the existing model more productive and then have lower overhead costs on its end to hopefully drive costs down while making everyone more profitable. I don't want to say scaled economy shared. It's an overused term, but I will say it's more of a non, what is it called? Non-zero sum. Yeah. Non-zero sum game where they're trying to basically make it cheaper, hopefully over the long run for the home buyers and home sellers, cheaper for the agents, meaning they can keep more of the profit and then cheaper for the real brokerage by keeping more of the profit themselves and just not have everything wasted in overhead costs. And this combination will allow real brokers to succeed if the commission's fees

come down on real estate transactions and the traditional brokers will struggle in a lower fee environment. I will say at this moment, there has been a big shift given the lawsuit within the brokerage industry on the fixed pricing of the 3% and 3% for the home buyer agent and the home selling agent. We may see some developments there, although who knows, it could stick even with the free market here. And again, Real Brokerage has succeeded rapidly with their brokerage business, but to further its ambitions, they're now going to try to work on adding ancillary services in categories that the real estate agents either operate in or with services that they need to work with in every transaction. I'll go through the first one here, then maybe Ryan can chime in.

In late 2022, they acquired Lemon Brew Lending, which is a home loan platform, later renamed to One Real Mortgage. Now, instead of just operating as the software backbone for real estate agents, homebuyers can finance their home purchases with the real brokerage, well, with one real mortgage. The attach rates for one real mortgage for the real brokerage agents is low today, but I expect this to grow over time. I think there are rules in the industry where you can't force customers to use them. It's kind of a collusion tactic that is anti-competitive. So they're not allowed to do that. But I would assume given the relationship here, it wouldn't be shocking if more and more people use this over time. I think it's in a low single digit

percentage of transactions. Now, the segment is small today at just $4.4 million in revenue, and they're essentially starting at scratch. They kind of just require the technology. But importantly, this segment has 50% gross margins compared to just 10% or so for the agent brokerage business. So on $100 million in revenue, potentially in the future, that could equal $50 million in gross profit, which you need a lot more in revenue from the brokerage business to attain so i assume they aren't doing the financing of this themselves they are using a bank partner well yeah in general it's essentially like look you're you have your loan officer i'm assuming i don't know the exact terms in the industry they underwrite the loan and then sell

it to a bank okay makes sense yeah just making sure they're not taking they're not a bank i mean that's that's way too much capital for a company of this size Sure. Yeah, I mean that makes sense. Zillow does a similar sort of thing with their mortgages segment where you can encourage the buyer to go through you guys to get a mortgage, but it's not guaranteed. There's probably some sort of natural upsell opportunities there between the agent and the buyer, but it wouldn't surprise me if the attach rate here wasn't enormous and it's not the end of the world. Even if they get, say, a 10% attach rate, that's still going to generate a good amount of gross profit for the real brokerage. So yeah, it can be, even with a low attach rate, it can be meaningful to the real brokerage's income statement potentially. Yes, sir.

All right. And now let's move into the other one, which anyone that's bought a home probably knows about, and that is title insurance and escrow. So basically, real brokerage has performed the same strategy for title insurance when they acquired Expatitle in 2022. too. And this business, shockingly, has now been renamed to One Real Title and offers title insurance and escrow services. Again, this is trying to vertically integrate the process, but you can't force people to use this. Not a novel concept, I'm sure, but a smart one that I think

can help bring high margin revenue for the real brokerage. Title commissions come with 80% gross margins that are even higher than the mortgage commissions, and it generates about the same in revenue at $5 million over the last 12 months. Apparently, there have been complaints about the quality of service with one real title. I saw this in my research, and I'm just looking at some online forums. But what's nice is that the company kind of acknowledged this on the latest conference call. They talked about a, quote, strategic re-pivot of the segment, which I translate to real words to mean we're going to fix the issues. So TBD on that one. Both of these segments, I think, have a lot of potential, but I wouldn't bank on them becoming... It's not going to become

100% of the transactions, but at, I think, well, they don't give exact numbers, but I think it was either 2% or 4% attach rates. There's room for that to grow. And if they are growing their overall brokerage business and that market share of title and mortgage stays the same, well, those segments will grow in line with the real brokerage. Yeah. I'm curious if they're able to improve expo title here or one real title as they call it now. A lot of these things, they kind of make sense on paper that it's like a logical fit for the agent to be pushing the next thing but i sometimes worry about whether or not there really is that attraction from the buyer's side of things like for example i think a lot of a lot of home buyers

just go with their bank for the typical market yeah it's an easy connection exactly all right let's keep talking though we've got a couple more segments that could i would call maybe high upside opportunities call options if you want to call them that right what is the real wallet Yeah, this one is probably the one I'm most excited about because it's something that, say, as you mentioned, a lot of customers might not stick with. And we're already seeing high, high adoption of it. So the real wallet was only launched in late 2024, and it serves as a digital wallet for real estate agents finances. They promise you to get your money faster, easily show commissions, payouts and revenue share and manage your finances all from a mobile application. And it already has a debit card that you can use with Apple Pay and Google Pay.

I think of it as the real wallet as your PayPal wallet, your wise account wallet, or really any other digital wallet slash hybrid bank account, but tailored specifically for real estate agents that use the real brokerage. I mean, getting that liquidity and all of that stuff within these transactions that can be, I think, fairly complicated is important. And I'm pretty optimistic on growth here. They already have 3,200 agents in the United States using the product compared to 27,000 total agents on the real brokerage. And that's only in less than a year, which I think is highly promising. And eventually, the company wants to perform more financial needs for agents, such as giving them lines of credit. I think they already do that in Canada, but don't have the approval in the United States. And if there's wide adoption of the real wallet, the real brokerage can widen its competitive

advantage by keeping their agents locked into the platform, hopefully reducing churn, and then start generating tons of interest income on the float held in these accounts, which I think is, from an investor perspective, that's where the earnings potential is for the real wallet. yeah i'm kind of curious what differentiates them from for a real estate broker or a real estate agent like what makes them special relative to just your standard banking app real brokerage or whatever they call it i think they call it reason or the one real app they got a lot of names and i'm not a real estate agent so i didn't get to use it essentially think

of it as their operating system so when you can merge that together and you don't have to say all right, I'm going to go to the outside bank, work with that, get all this together. The whole thing can be managed through the OneReal app. So it makes sense to adopt that. It's a similar to having, as we're all aware of, or at least many of the listeners would be aware of Ryan is as well. When you have a credit card that is with a different bank than your primary bank provider, you get a little frustrated. Oh, I got to have two apps, different billing. It's all confusing. This kind of consolidates everything for the agents and hopefully makes it much easier for them. This episode of Chit Chat Stocks is brought to you by Blue Chippers Club. The club

was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. You can break down your portfolios, pitch stocks, receive feedback, talk to other people about their stock ideas, get insights for your own portfolio, and participate in weekly calls with other investors. We love this idea. We wanted role models when we first started to get into an investing. And we think that joining Blue Chippers Club can really help you level up as an investor, bounce ideas off other people, talk with us, talk with many other investors that have joined the network. If you're interested in joining, head on over to bluechippersclub.com and hit apply. The link will be in the description.

Yeah, I guess in the long run, every company becomes a bank at some point. And that's the goal for the real brokerage. All right. Last one, I believe, last sort of call option, if we're designating it as that. This one caught me off guard. Leo AI. Thoughts? Yeah.

This one is, I think, part of it is to get part of the AI hype cycle, but there is, given all the busy work within the industry, a lot of potential to automate some process. So Leo AI is a support agent they just launched that is AI for all the agents working with the real brokerage. It can be trained on your agent qualifications, history, and potentially even your voice to provide basic chats and even calls with buyers and sellers. Also helps generate content for social media, essentially just helping you be more productive in theory, as we'd hope. But who knows about the execution on all this stuff? The company may be hyping up these capabilities today. They talk about it a lot in conference calls.

You know, they want to take advantage of the AI narrative. They even had prepared remarks from the CEO on the conference call read by Leo AI instead of him. So it was trained on his voice. And then the opening remarks on the conference call were read by the AI. And then afterwards, he disclosed as kind of a joke. I thought that was a good natured joke. But again, we'll see if it actually gets in use from all of these agents. whatever the actual AI that gets used from this, I think there is a ton of potential to make this

valuable for agents to save them on busy work while they work with clients in the field. I mean, there's just a lot of busy work. It seems like paperwork, filing, sending stuff, getting signatures to deal with in residential real estate and improving that and making the agents more productive will again, not generate direct revenue, but it will hopefully be a churn reducer for the platform and getting people to switch. Over the long term, I guess, they say they want to have Leo AI be used by buyers and sellers. That's a bit of a moonshot.

We'll see. I'd say don't factor that into any models, but hey, they've been successful so far, so who knows? We'll see what happens there. And just putting everything together, mortgage title, real wallet, Leo AI, if the real brokerage executes in scaling all these ancillary services

that circle around its brokerage business, I think it has a chance to be a truly strong operating system for real estate agents. You have the moonshots as a part of it, but even the easy stuff that's just kind of making their lives easier as agents, you get wider moat, you get less churn, and you get more revenue opportunities. And hopefully that leads to better financial performance.

Yeah, it caught me skeptical on the Leo AI. honestly i why do you think that like there's all these perspective chats that they have to make with people i mean there's just tons of communication you know you could say look hey what's your information it gives you all the information there's there's a lot of busy work that can be automated with that's literally their entire jobs though like that the busy work is what they are paid for that's so i would be i would be skeptical that a lot of agents are willing to risk just using an ai agent to for like their communications with clients introductory info oh i mean if they're just using it for like cold reach outs maybe but say like yeah say a

home buyer home seller reaches out and then the chatbot can basically give basic information like this is my expertise this is my history this is blah blah blah all the information you'd want And then you say, if you want to call me, we can have a chat or we can meet in person. And it can even probably, as the AI agent people say, schedule a meeting with people. Now, the voice stuff, I think maybe goes a bit too far because I don't know if someone would want to become your real estate agent by just talking with your AI on the phone. But with the chatbot stuff, I mean, 100%, I think that can help make them more productive, which is really, again, i think part of the reason for the real brokerage existing maybe in theory yeah but like real estate agents it's like one of the most competitive things in the world right right and you want

to go to any agent no no i'm saying i could go to any agent if i'm buying or selling do i am i really going to go to the one where i figure out that i'm talking to an ai Probably not. Well, I think you got to think about it from the agent's perspective. The more deals they close, the more money they make. And if these tools can make them more productive, there's only so many hours in the day, that's the real brokerage's opportunity. That is their customer. The customer is not the home buyer or seller.

They want to make the real brokerage's agents more productive. And why not work on these AI tools that can help with it? Maybe. I mean, yeah, I guess it could be worth it. I feel like they probably could have just bought this functionality instead of, like, hiring the developers to do this themselves. Oh, they definitely are. I mean, they only have, I should look it up, but they have, like, 200 employees. So they're definitely using, like, a different service to build this.

They're not building it from scratch. Okay. Yeah, then I'm all right with that. Yeah, I just worry about for a company of this size, scattered bets or scattered focus. They've got five different underlying segments here. How much between title, mortgage. if some of this is being done by the agents that's fine but you got to maintain it i mean you can see with the complaints about the title service like it requires work from the company to maintain these services so i worry that you're a company that does 128 million dollars in essentially net revenue is it worth having all these sort of moonshots i worry about mostly they're not moonshots mostly they're not moonshots i i don't think these are like

scattered segments. If they went into commercial real estate, now that would be a whole completely different ballgame. These are all things that real estate agents want, as opposed to maybe some of the AI stuff they don't want, but they want to be more productive. This all relates to the same transaction. You have to get title insurance. You have to get the loan, blah, blah, blah, blah, blah. This all connects kind of as a hub and spoke model, maybe, or maybe just process that they want to vertically integrate and do together. I don't know if it's scattered, but I agree with you. They are a small company and they will need to invest and make sure these are quality services. And seeing those complaints is definitely a slight yellow flag, but we'll see.

There's always growing pains for a small company. Let's talk about the growth thus far. We've mentioned the revenue growth, the gross profit growth, but the agent growth is maybe the most impressive thing here. How much confidence do you have that they will continue to grow share? Well, I think they may be on the cusp of a continued growth inflection in the real estate industry. Management estimates they're at about 2% market share. That does not include title, mortgage, and the real wallet. So 2% of just overall transactions. I think Remitly came to mind here when looking at the real brokerage. They are a low cost disruptor taking market share, but with plenty of room to keep stealing share from the legacy players, I think it reminds me

heavily of them. The real brokerage has 27,000 agents or just below 27,000, but probably has surpassed that mark. Now, there are an estimated 2 million real estate agents licensed in the United States. And really, if only half are like serious workers, some of them aren't practicing. That provides an immense opportunity for the real brokerage to take share. My question is why can't they eventually get to 100 000 agents using its platform if 27 000 thought that they were the best option for them wouldn't there be more i think that's highly doable and given the growth from essentially what was the number here i guess i kind of clipped it badly uh from the fin chat chart there 1 000 it was at basically 1200 agents uh in i think september

of 2020. Yeah. Now 27,000, that's another highly impressive stat. Now the real brokerage generates approximately $4,700. So $4,700 in gross profit per agent signed to its brokerage. I believe that figure can maybe grow to $10,000 over the longterm with the monetization opportunities at title mortgage and real wallet. If it doesn't get there, it won't, but I think it can grow over time and ryan's showing this chart here i'd say cut shout out to that custom metric generator on finchat use our link get 15 off any paid plan it was really really valuable for this episode because say in the past i would have to calculate this stat myself now i can use just revenue and then total agents kpi that they had there and create this wonderful um chart do you

Just a couple of seconds. Do you want to mention what the inputs were here? Yeah, it's just revenue. So it's just a ratio. You just take total revenue of the trailing 12-month period, and then you divide it by ending agents in the quarter. So it's not exactly perfect because you have ending agents versus dynamic agents, but whatever. It's a trackable metric, and it's gone from – And you said revenue there.

Gross profit. Oh, yes. Thank you. Thank you. Thank you. Gross profit, which I guess you kind of think as their net revenue, as we've been saying, gross profit divided by total real estate agents on the platform. It's gone from a quite a low number in 2021, and it's climbed and climbed and climbed, I think steadily to about 4,700 and change over the last 12 months. I mean, just think about that.

If they get 100,000 agents on the platform, they can grow to $10,000 in annual gross profit per agent. That's a billion dollars in annual gross profit compared to today. I'm really not concerned about Reel's ability to grow. There's a ton of room if they execute. You go from 2% to 4% market share, you're not even a large player in the space, and you've doubled your market opportunity. Yeah, and they've got a compelling proposition to agents. It's not like they've just brute-forced their way to growth. there's a natural attraction to this business model and it's money if you're a real estate

agent. So let's talk about some of the competitors though. Obviously this model seems attractive, but it's not the only one. So who would you consider to be the competitors to the real brokerage? First, we have the legacy players. Those are the traditional ones that we talked about. I think these are easy targets for where real brokerage can take market share And I'd expect them and other cloud price providers to grow and take share from them. Because with the rise of the internet, you don't have, again, let's compare it to stocks. You don't call up your broker anymore unless you are Warren Buffett. And in reality, for him, it's even a little bit different.

You call it Goldman Sachs. I think there's going to be a consistent switch to the software model where you don't need these wild, sprawling offices of all these legacy players, and it's just going to be a slow burn over time. Second, we have players like Compass, which is a big VC company people may have heard of. They are a digital-focused broker that got a ton of venture capital funding, much more than the real brokerage. They focus a little more on, I think, the luxury market, and they try to be a high-end brokerage. But when I look at them, they only had 33,000 agents on their platform. and again, the real brokerage has 27,000 with much less VC funding. And I'm not an expert on

Compass. That's maybe another company I'd want to study to really understand how the real brokerage sits within the industry. But their results with all of that VC funding plus the capital markets, I'm assuming I don't have the full numbers in front of me. It seems like the real brokerage executing with less. I'm going to include a Reddit thread here of people basically comparing all of these cloud-based brokerages in Compass. And it looks like the real brokerage has a good niche within the space. And then what's maybe most promising is that they have a direct competitor in EXP World Holdings. The ticker is EXPI. Luckily, they're public. And that's another cloud-based brokerage, but it is older than the real brokerage. There's about $4.6 billion in

annual revenue, but the real brokerage is catching up quickly. In 2020, eXPI did $1.8 billion in revenue. The real brokerage did $16 million, and that's caught up to $1.4 billion today for the real brokerage. And eXPI's revenue at $4.6 billion and stagnating. I'm going to include a good chart there from FinChat comparing both within the newsletter. And the last thing I should say is that the state of the real estate industry is frozen. The transactions have fallen in the tank with high interest rates and high home prices, supplies building up and stuck.

Eventually, I believe people are gonna sell these homes. I don't know when, it could be next year, it could be this year where the trend changes. And the real brokerage is really facing a macro headwind right now. Pre-pandemic, I have a chart of this in the newsletter, existing home sales were around 5.5 million a year. Today they are comping at seasonally adjusted $4 million or sorry, sorry, 4 million total homes sold per year existing home sales.

So from 5.5 million down to 4 million, that is a lot of real estate agent commissions that have disappeared. I think they probably come back one day and these headwind turns into a tailwind for companies like The Real Brokerage. So I think the growth can continue to sum that up. Yeah, they've been a very clear share taker in the industry. A lot of the cloud brokerages have been share takers in general from the legacy model, but even among the cloud brokerages, they've been a share taker as I just shared with that chart. EXP World Holdings versus uh real brokerage yeah they've just kind of climbed numbers tell the story yeah i think today they're probably 25 almost no maybe even a third of revenue of exp's revenue as opposed to

being like one 100th maybe five years ago yep let's shift gears a little bit actually i will say there's a house in my neighborhood listed by compass so uh well it must have been a fancy neighborhood no i don't so i don't know i don't know if it's pure luxury no it's not it's not but they they do talk about that i guess i should research more but they yeah they talk about getting utilized by the high-end market but i'm sure they're utilized by everyone so there have been, I guess, murmurs online of this being a multi-level marketing scheme. Can you maybe describe why some people think that it is a multi-level marketing scheme? And then I guess the rebuttal to that. All right, folks, if you are a regular listener to Chit Chat Stocks,

then you know that we use FinChat.io daily. FinChat is the complete financial data platform for stock-focused investors. They have robust financial data on more than 100,000 stocks globally, including company-specific segment and KPI data. So you want to see Amazon's revenue from advertising? Finch has got it. How about Netflix's subscribers by region? Yep, they've got that too. And they just added Morningstar research reports for all subscribers. So if you are subscribed, you can now get all the latest Morningstar high-quality research reports on more than 1,500 stocks globally. If you're interested, head on over to finchat.io slash chitchat. All new users automatically get two weeks of FinChat Pro for free. But if you want to extend to any

paid plans, our link will get you 15% off. That is finchat.io slash chitchat. The link will be in the show notes. Right. So a lot of people kind of compare it to an MLM scheme such as Herbalife. You know, you have some pyramid-esque characteristics, not to say that as a swear word, but to the marketing strategy, you know, you're paying hefty referral fees for existing agents. And that does make up the bulk of their marketing expense when they recruit new agents to the real brokerage. I don't believe this makes them a scammy MLM, even if there are characteristics to this, because I should say an MLM such as Herbalife still operates and is completely legal. A scammy MLM simply focuses solely on recruiting as many new customers to keep expanding the pyramid down and down and down. Well, from what I've found, and I think with the real brokerage, they are truly committed first on building its products for agents like we talked about extensively above. It wants them to use the real brokerage as a real estate agent first, not primarily as a recruiter.

you're not going to switch your job to just be, oh, I'm going to solely recruit more agents to work below them and earn fees. I would say, was PayPal and MLM for paying high referral fees if you convinced a customer to join? Is any financial services company and MLM for doing that, which is a very common tactic within that industry? No. And I don't think the real brokerage is either, something that yeah there's a fine line between a proper ll mlm which helps companies grow and a pyramid scheme maybe i shouldn't say a fine line a wide line pretty wide line but i think that the distinction is focusing on the product first and not primarily having people focused on recruiting yes it's that under the sort of that assumption basically every every

single affiliate network would be an mlm right which is just kind of you know it's turning your customers into sort of brand ambassadors i don't think there's anything wrong with that that seems to be what the real brokerage has done right and it's perfect within the industry because real estate agents it's a community focused thing a lot of people talk it's all localized yeah the bulk of the real brokerages $57 million in annual marketing expense, which is 50% of their gross profit right now. It's their highest expense that is spent on agent referrals and stock bonuses. But I don't think that makes them a shady MLM. I think that makes them, again, using a referral program that has worked really well and aligning your agents to stick with you, get those stock

options or RSUs or whatever they use, and get people aligned with a rising stock price. Now, some real estate agents did say they got some MLM vibes from the eXp cloud brokerage because of the intense focus on recruiting new agents instead of just doing your job. Maybe this is why the company is losing market share to the real brokerage, but something to track over time. Hopefully, if you're a real brokerage investor, you keep seeing these market share gains from the real brokerage versus eXpi. And this will kind of shift into talking about management. We'll keep it short here. The Real Brokerage was founded by Tamir Poleg. He is the CEO today and he owns roughly 3.5% of the outstanding business, according to Finchat. I like that shareholder alignment,

founder-led, owns a good amount of stock. And I don't, this segment's always weird because you kind of just go, well, do you like or dislike the management team? Do you think they're trustworthy? I tend to like Poleg from what he was talking about. Yes, he pulled that weird little joke on the conference call, but I don't think there's anything wrong with that. He's trying to hype up his new product. He gets what is needed to drive a competitive advantage in this space, which is aligning the success with each other, meaning real estate agents and the brokerage, driving down costs for them, giving them shareholder alignment and using that marketing advantage to build scale and attract agents in an efficient manner. there is aggressive spending on marketing but given how fast they are growing i think the unit economics are work it worth it and he's a jockey i'm willing to bet on so far i think it's an early stage company i should say you know we're going to need to track his actions

decisions temperament to increase my conviction that he is a founder that deserves to be bet on there's going to be whatever it is a rough patch at one point seeing how he navigates that will be important but yeah so far it doesn't seem to be scammy seems like one of the few small cap management uh managers that has a rational head on it on their shoulders all right let's talk valuation we it's unprofitable at the moment on a gap basis they do generate positive cash flow which is a good sign and it you know there's some sustainability here it's not like you're modeling out the burn rate and concerned that they're going to go bankrupt tomorrow yep clean balance sheet too although we're not going to get into the details on the episode

what do you think they can earn in the future and how does that compare to the price today Okay. Context first. Again, they are a low margin business. Gross margin was 9% over the last 12 months. And the company pays out a lot of stock-based compensation. Counteracts this with a lot of this SBC paid agents and management with share repurchases. And I think a short history says that they are pretty astute in timing these buybacks with lower stock prices. But again, they're not someone that's just paying a ton of like part of their model is paying a lot of their expenses as stock to their agents, which is not necessarily a bad thing. And then their cash flow is going to be mismatched with their earnings, which we're going to look at earnings more than cash flow. But it gives them that cash to buy back stock. And I don't really think of it as a terrible model. It's just a little bit different than usual, and I don't think it's scamming whatsoever.

Now, when we look at the margins, scaling up mortgage and title can edge gross margins higher. Remember, 50% margin on mortgage, 80% on title. And then when we're talking about finding some sort of bottom line gross margin, we need to consider that there are durable and marketing costs that are going to come with agent referrals, agent revenue share, and agent stock bonuses. There should be some operating leverage here, but it's going to be a sizable portion of that gross profit going forward and probably forever. Now, of course, there's always overhead costs and then research and development. I'm not concerned at all about revenue growth. Revenue was up 76% year over year last quarter in a still

tough operating environment. Some listeners might call this aggressive, but I think 50% annual revenue growth for the next five years is doable for the real brokerage. Huge market share gains, a huge history of market share gains. There's a potential to keep getting market share at just 2% of the industry, and you could have the macro headwinds turning into tailwinds. I'm trying to be accurate, not stupidly conservative, and this actually seems like a good ballpark. Whether it's 40%, 35%, 60%, I don't know, but I think that is a good estimate when you have so much market share to take, headwinds that can turn into tailwinds from the total transactions within existing home sales, and the potential of title, mortgage, and the

real wallet. Now, 50% revenue growth for the next five years brings revenue to $10.7 billion. And the big question is, what would be a bottom line operating margin or net income margin, say, five years from now? I ran a few different estimates. 3%, which seems very, very doable, is a 3% margin is $321 million in earnings on over $10 billion in revenue. 5% would be $535 million in earnings. And if you even got to what I would say is an unlikely 7% bottom line margin, that is $750 million in earnings. And assuming share count stays neutral because of buybacks and the aggressive cash flow they're going to have, we have a market cap of $858 million in five years at today's stock price of $4.16. So with a 3% margin, that's less than three times

20, 30 earnings. Don't think we even need to run the numbers on the other ones. It can get extremely cheap quickly if we see durable high revenue growth as they have been doing and operating leverage i think the stock looks cheap today very dirt cheap and assuming the company would trade at just again these numbers are putting just numbers out there as an example i'm if we get to that three percent margin figure which i know it's hard to talk about on the episode, but they would have a 2.7 times 2030 earnings multiple on today's stock price. If they traded at 27 times earnings, just moving that decimal one place over in 2030, because they're still growing quickly, they're winning market share, it's an attractive model, you would

have a 10x for shareholders before considering any capital returns. And maybe a 5x if the multiple bull stays at, what would that be? Under 15, 13 and a half. And of course, things might not go as planned. It's probably not going to follow this path, but I think the stock looks to trade, even though it's unprofitable today, I think it has a margin of safety, even if revenue growth decelerates quite quickly. Yeah, I think this has the makings of a legitimate multibagger. My personal best investments have probably come from those companies that have true momentum they're growth oriented and product focused and they haven't turned the corner to profitability yet and so you get skepticism from

well street or maybe they're too small for a lot of people to care that people aren't able to model out earnings and sometimes it's i think the difficulty with a business like this is the drivers aren't always clear like how do you get to that 40 revenue growth figure it's you it could be a little different i don't know exactly what it's going to be it's not always clear what's going to drive the growth from here but well market share gains well i'd say maybe what's going to drive the market share gains aside from them just having momentum a good product and a great referral network it's not like it's hard to pinpoint you can't just say i'm trying to think of a simpler business here philip morris they're going to sell uh the same amount of cigarettes in

a year have this much in price increases and you can really easy get to the right figure based on just general assumptions it's it's a lot more guesswork and but i think at my question would be, why wouldn't they keep growing? Why wouldn't they continue to take share? What's stopping real estate agents from moving to this model and joining the real brokerage? I think right now, it feels like they have a lot of momentum for a good reason. Yeah, they have a lot of momentum. Now, some people may argue, oh, you look at eXPI. They grew quickly and then stagnated. Now, someone else can come into the industry and be even more disruptive. But I think that's maybe not looking at the big picture and that eXPI seemed to be a

bit more promotional, MLM focused, and not operating and creating value for these real estate agents. So what I like seeing with the real brokerage is, I know we discussed and debated the potential of some of those products. They are focused primarily on building products for their agents and keeping them from churning to other platforms. Could another company come in and even have lower commissions, perhaps. That feels very uneconomical. And the more scale the real brokerage has, the more they can drive down costs for their customers. So I like the potential here. Is it a wide moat business today? No. But could they have a wider moat in five years? Yes. And even wider in 10 years? I think yes. Like any investment, it's not guaranteed to work out, but maybe we can talk

about it leading into the final question i think maybe people uh know what way i'm leaning on this stock but ryan anything else before we close out here no i guess the last thing i'd add is there are definitely some elements to the referral network that might seem scammy like the pay a lot they pay they pay good money to people that refer and they have the stock bonuses to their network which sometimes it feels weird to be giving stock to your customers type of thing to contractors yeah they're also essentially salesmen for you as well so in a way i mean if they're growing the platform and they're referring new customers to the real brokerage i think that actually makes for a really powerful incentive

even though it can feel a bit scammy and i think they're doing a decent job managing that with the buyback as well if you look at pure dilution i don't think it's been too bad let's let's wrap this up here i personally was very impressed by this company and i'm glad you did this report are you going to buy shares of the real brokerage i think i should buy shares i'm not going to buy until after this episode comes out just to be i mean we're not a big enough show that can move the stock, but just to be fair for listeners, never want to front run anything. So after the show comes out within a couple of days, I probably will end up buying. I think I should buy it. I think the real brokerage has a chance to be a 10 bagger and be a huge winner in the residential

real estate space. And I think it is trading in a reasonable valuation with a good founder at the helm. Is it guaranteed to work? No, don't make this a hundred percent of your portfolio. Never make any stock 100% of your portfolio, except for maybe Constellation Software or Berkshire Hathaway. To do so, though, I think I need to trim an existing position. I'm kind of running up on too many stocks in my portfolio. Maybe that's another decision to make. That's something we could talk about on another podcast. But I like the stock. I think given how... What's my entry-level position? It's about 5% is what like a entry level, not entry level, but like a normal position I have in my portfolio. So I could see

myself making it a 5% position. It's not going to be something like Nelnet at the extreme, which is about 20% of my portfolio or something else like a, what's the other one? A coupon. That's about 10%. I'll need to build up that trust over time, but I don't think, I don't want to make this a starter position because I like the business and I don't want to give up upside but making it too small of a position in the portfolio just because it's quote unquote a small cap yeah i think obviously there is some it's not harbor diversified it's not a i don't think it's as risky as some of those micro caps there's more risk to this than obviously some of the more established operations because at the end of the day it's somewhat of a

new concept i guess it's probably five years old but yes i i think you're probably going about it the right way and i was really impressed by this i think the management team's done a fantastic job even if it doesn't even if it looks like there's some hair on it from an investor's perspective with the stock issuance to uh the unprofitable agents yeah but really they i mean if you were seeing this many agents onboarding, wouldn't you be investing heavily into it as well? If you were management, it seems like a no brainer for them to be doing that. So yeah, I really like this and it feels like, yeah, making some multi-bagger potentially. I think that's going to do it though. Thank you everyone for tuning in. Thank you to FinChat for

all the charts. And remember we publish these reports on our sub stack as well, totally free that has all the charts included. So gross profit per agent and some of those other lovely charts that Brett had in here. They'll all be up there. Thank you again for tuning in. We want to remind all the listeners that Brett and I are not financial advisors. Anything we say or discuss here on Chit Chat Stocks is not formal advice or recommendation. Brett or myself may buy, sell, or hold any of the securities discussed in this podcast. Thank you again for tuning in. We'll see you next time. Thank you.