Leo CoPilot And Fintech Ecosystem Will Improve Client Experiences

Key Takeaways

• Expansion of the consumer-facing ecosystem and financial products is expected to streamline experiences and enhance profit margins through efficient service attachment.
  
• Strategic scaling of services like mortgages and titles and adjustments to fees aim to boost profit margins and improve long-term profitability.
  
• High revenue growth faces risks from market conditions, increased operating expenses, and business model changes affecting profitability, agent retention, and future earnings stability.

Catalysts

Operates as a real estate technology company in the United States and Canada.

• Real Brokerage's rollout of a consumer-facing product and a holistic ecosystem of financial technology products are expected to streamline client experiences and enhance attachment of higher-margin ancillary services, which could increase gross profit margins.
  
• The AI-powered agent assistant, Leo CoPilot, and upcoming Leo for Clients product are set to enhance productivity and efficiency, potentially boosting net revenue and reducing operating costs.
  
• The expansion of Real Wallet and its planned new product offerings in Canada and the U.S. (including lines of credit and tax accounts) are anticipated to drive additional revenue streams with high margins.
  
• Scaling of One Real Mortgage and One Real Title, with significant growth in loan officer count and attach rates, is expected to enhance gross profit mix and improve long-term profitability given their higher margin profiles.
  
• Strategic changes in the business model, such as increased transaction fees and adjusted commission caps, are designed to manage costs and enhance the overall margin profile, potentially improving net margins and profitability.

Real Brokerage Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Real Brokerage's revenue will grow by 25.3% annually over the next 3 years.
• Analysts are not forecasting that Real Brokerage will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Real Brokerage's profit margin will increase from -2.1% to the average US Real Estate industry of 5.2% in 3 years.
• If Real Brokerage's profit margin were to converge on the industry average, you could expect earnings to reach $129.6 million (and earnings per share of $0.52) by about April 2028, up from $-26.5 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 16.0x on those 2028 earnings, up from -31.7x today. This future PE is lower than the current PE for the US Real Estate industry at 21.3x.
• 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 7.64%, as per the Simply Wall St company report.

Real Brokerage Future Earnings Per Share Growth

Risks

• The company is experiencing high revenue growth, but the market conditions in the real estate sector, such as historic lows in existing home sales and higher mortgage rates, if prolonged, could stall revenue and affect future earnings.
  
• Dependency on ancillary services like mortgage and title to drive higher profit margins means that if adoption or integration issues occur, it could negatively affect gross margins and overall profitability.
  
• Although there is significant growth in agent count, maintaining quality service and retention amidst rapid scaling could be a challenge that affects operational efficiency and incremental revenue growth.
  
• Increased operating expenses, including investments in fintech and compliance, could outpace growth in gross profit, impacting net margins, especially as Real transitions into a more investment-heavy phase.
  
• The changes made to the business model, such as increased transaction fees and adjustments to agent incentives, could result in agent dissatisfaction or attrition, potentially impacting future revenue and earnings stability.

Valuation

• The analysts have a consensus price target of $6.667 for Real Brokerage based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $6.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.5 billion, earnings will come to $129.6 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.6%.
• Given the current share price of $4.12, the analyst price target of $6.67 is 38.2% higher.
• 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.