Acquisitions And Mortgage Title Services Will Expand Market Presence

Key Takeaways

• Fathom Holdings aims for sustainable positive adjusted EBITDA by 2025, powered by revenue growth and cost management.
  
• New acquisitions and expanding ancillary services could significantly boost revenue and enhance market presence.
  
• Rising mortgage rates and shifts in buyer behavior challenge Fathom Holdings, impacting revenue and profitability amid regulatory, litigation, and integration risks.

Catalysts

Provides a real estate services platform that integrates residential brokerage, mortgage, title, and insurance services in the United States.

• Fathom Holdings anticipates achieving sustainable positive adjusted EBITDA potentially by the second quarter of 2025, driven by revenue growth and cost management initiatives, which could improve net margins and overall earnings.
  
• The recent acquisition of My Home Group is expected to contribute approximately $110 million in revenue for 2025, significantly boosting overall company revenue.
  
• The company is actively exploring additional acquisitions and walkovers of smaller brokerages, likely increasing revenue and market presence.
  
• Fathom Holdings is focusing on ancillary services like mortgage and title, which have been growing faster than real estate revenue. This cross-selling opportunity could enhance gross profit and margins.
  
• Efforts to improve agent growth and retention, including new revenue share programs and agent-focused initiatives, might increase transaction volumes and thus revenue.

Fathom Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Fathom Holdings's revenue will grow by 22.5% annually over the next 3 years.
• Analysts are not forecasting that Fathom Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Fathom Holdings's profit margin will increase from -6.0% to the average US Real Estate industry of 4.3% in 3 years.
• If Fathom Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $28.0 million (and earnings per share of $0.82) by about July 2028, up from $-21.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 2.4x on those 2028 earnings, up from -2.1x today. This future PE is lower than the current PE for the US Real Estate industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.2%, as per the Simply Wall St company report.

Fathom Holdings Future Earnings Per Share Growth

Risks

• Rising mortgage rates and shifts in buyer behavior have posed challenges to Fathom Holdings' operations, potentially impacting future revenue if these trends continue.
  
• The company has experienced ongoing litigation and regulatory changes, which could lead to increased expenses or potential settlements, affecting net margins.
  
• Despite revenue growth, the company reported a GAAP net loss for the year, indicating challenges in achieving profitability, which directly impacts earnings.
  
• A reliance on acquisition-driven revenue growth presents a risk of integration challenges and unforeseen costs, which could negatively impact net margins if not managed effectively.
  
• High turnover rates among low-producing agents suggest potential instability, which can disrupt operations and hinder consistent revenue growth if not addressed.

Valuation

• The analysts have a consensus price target of $1.5 for Fathom Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $657.6 million, earnings will come to $28.0 million, and it would be trading on a PE ratio of 2.4x, assuming you use a discount rate of 9.2%.
• Given the current share price of $1.59, the analyst price target of $1.5 is 6.0% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.