Fathom Holdings (FTHM) aims to raise $20 million in an IPO of its common stock, according to an amended registration statement.

The company operates an online real estate brokerage service in the U.S.

FTHM has grown revenue but operates a very low margin business due to its high revenue share rates to entice agents to use its platform.

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Cary, North Carolina-based Fathom was founded to create an online platform for its real estate agents to facilitate the buying and selling of real estate via the Internet.

Management is headed by founder, Chairman and CEO Joshua Harley, who was previously founder and CEO of Texas Home Central.

Below is a brief overview video of the firm's approach:

Source: Fathom Realty

The company currently operates in 100 separate local markets in 23 states and says that it is the 16th largest independent brokerage in the U.S.

There will be at least one selling shareholder, although the identity of the shareholder was not disclosed.

There are no institutional shareholders of the company. Founder and CEO Harley owns 50.7% of company stock pre-IPO.

The firm focuses on attracting real estate agents to its platform by effectively sharing more of the transaction commission with the agent and taking a flat fee per transaction.

Fathom's business proposition is that it allows independent agents to more effectively compete in an increasingly price-competitive industry.The company said it had 3,629 agents working through the system as of September 30, 2019.

Marketing expenses as a percentage of total revenue have been stable as revenues have increased.

The marketing efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of marketing spend, was an extremely high 94.9x in the most recent reporting period.

According to a 2019 report by IBISWorld, the market for real estate sales & brokerage in the U.S. is expected to reach almost $167 billion in revenue in 2020.

The is a forecast 1.4% increase from 2020. Assuming this, the industry will have grown an average of 3.3% per year from 2015 to 2020.

The main drivers for this expected growth are continued low interest rates and a strong job market provide property buyers with ample ability to afford new homes, especially among younger demographics such as Millennials who are buying homes for the first time.

The company cites three primary types of competitors to their services:

  • National independent real estate brokerages and franchises
  • Companies that seek to disrupt the traditional brokerage model
  • Companies that purchase homes directly from sellers

Fathom’s recent financial results can be summarized as follows:

  • Growing topline revenue
  • Increasing gross profit and gross margin
  • Increased operating losses and negative operating margin
  • Growing cash used in operations

The firm’s financial results for recent reporting periods are shown here:

fathompl

As of December 31, 2019, FTHM had $579,416 in cash and $3.6 million in total liabilities.

Free cash flow for the twelve months ended December 31, 2019 was negative $1.152 million).

FTHM intends to sell 2.5 million shares of common stock at a midpoint price of $8.00 per share for gross proceeds of approximately $20.0 million, not including the sale of customary underwriter options.

An existing shareholder intends to sell $1.5 million of stock in the offering.

Assuming a successful IPO at the midpoint of the proposed price range, the company’s enterprise value at IPO would approximate $101.8 million.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 19.65%.

Per the firm’s most recent regulatory filing, the firm plans to use the net proceeds ‘ for general corporate purposes, which may include financing growth by obtaining agents at a faster pace, developing new services and funding capital expenditures, acquisitions, and investments.’

Management’s presentation of the company roadshow is not available.

The sole listed underwriter of the IPO is Roth Capital Partners.

Commentary

Fathom is seeking public capital market investment to continue its expansion initiatives, which include enticing more real estate agents to use its platform in return for higher commissions.

The firm’s financials show significant topline revenue growth, higher gross margin, but higher operating and net losses as well as operating cash burn.

For Q1 2020, FTHM posted an increase in revenue but a continuation of the low margin revenue model as the company shares such a high percentage of its revenue with agents.

Marketing expenses as a percentage of total revenue have been stable but the marketing efficiency rate, while still very high, has dropped.

The market opportunity for conducting real estate transactions online will likely grow markedly in the coming years, especially in light of the probable semi-permanent behavioral changes brought about by the Covid19 pandemic.

Roth Capital Partners is the sole underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 5.8% since their IPO. This is a top-tier performance for all major underwriters during the period.

As a comparable-based valuation, FTHM’s IPO is priced far below that of Redfin’s valuation metrics.

However, I have to admit I’m not a fan of its ultra-low margin revenue model.

Absent a turn toward profitability, I’m on the fence with this IPO, so my opinion is NEUTRAL.

Expected IPO Pricing Date: July, 2020.

Glossary Of Terms

(I have no position in any stocks mentioned as of the article date, no plans to initiate any positions within the next 48 hours, and no business relationship with any company whose stock is mentioned in this article. IPO stocks can be very volatile in the days immediately after an IPO. Information provided is for educational purposes only, may be in error, incomplete or out of date, and does not constitute financial, legal, or investment advice.)

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