For luxury-goods reseller RealReal Inc (NYSE:REAL), the investment case is reasonably simple. REAL stock is valued essentially in line relative to other marketplace stocks. Therefore, its future trajectory boils down to whether the company has the best business model to succeed against the competition.
There’s an argument that it does. The company’s TheRealReal site, which offers authenticated luxury goods, has posted impressive growth. In its prospectus, the company cited an estimate that its potential addressable market could near $200 billion. Direct competition is somewhat limited, meaning RealReal Inc should at worst keep substantial market share.
This is a business that should grow for some time. Valuation is acceptable, if hardly cheap. And so, if the company can outgrow its peers, REAL stock should outperform the market. However, reasons for both optimism and caution abound.
REAL Stock Valuation
Using 2018 results, REAL stock looks reasonably valued compared to its two most obvious peers. According to the prospectus, RealReal generated $507 million in net merchandise value (NMV) and $207 million in revenue. The current enterprise value of roughly $1.8 billion, after its recent initial public offering, suggests that REAL trades at 3.6-times NMV and roughly nine-times revenue.
Farfetch (NYSE:FTCH), another luxury marketplace, trades at a bit under four times its gross merchandise value (GMV) and a similar nine-times multiple to its top line (Fartech’s GMV is equivalent to RealReal’s NMV). Both companies posted revenue growth above 40% last year.
Meanwhile, Etsy (NASDAQ:ETSY), trades at roughly two times its 2018 gross merchandise sales (GMS) and 13-times revenue. Etsy’s platform is larger, and its growth slower (guided to 17% to 20% in 2019). As such, investors assign a lower multiple to GMS. But its established profitability and clear dominance of the craft niche, at least for now, give it a higher multiple to sales. I’d note I also questioned that valuation back in April, and ETSY stock only has pulled back modestly since then.
To be sure, an investor can value REAL stock in other ways. For instance, its customer lifetime value (LTV) remains well above its customer acquisition costs (CAC). Modeling the number of customers over time, and the profitability of those acquired customers, can lead to cash flow-based fair value estimates.
But from a broad perspective, the point is that REAL stock two weeks after its IPO has a reasonable valuation, at least on a peer basis. That’s true even considering other platform plays in different end markets. Uber (NYSE:UBER) and Lyft (NASDAQ:LYFT) get higher valuations, but have bigger addressable markets. Running on the cheap end is eBay (NASDAQ:EBAY). However, stagnant growth explains this deflated value.
The Case for RealReal Inc
This is not to say that the current REAL stock price around $25 necessarily is “right.” Investors can disagree about valuation. But at least on a peer basis, it’s clearly in the ballpark of reasonable. And if RealReal turns out to be the best model of the group, it’s likely shares will dominate their category.
After all, the used luxury-goods market is huge. RealReal Inc wrote in its prospectus that it was looking at other categories; could it potentially move into an area like collectibles (whether sports or film-related)? Competition exists but seems limited. eBay rolled out an authentication offering in late 2017; however, the last time management discussed the issue on a conference call was in early 2018. It doesn’t seem like that effort has gained much traction.
Privately held Poshmarkmay be considering an IPO itself, and has an authentication business as well. But by all accounts, TheRealReal is much larger. And its “end to end” service makes consigning higher-end goods much easier.
Meanwhile, existing sellers and customers seem to like the site. Approximately 80% of goods are sold within just 90 days; sell-through (goods sold versus goods added) was 96% in 2018. REAL gets particular value from those sellers who become buyers, which is now over half the total.
This seems like a very attractive model, and one which RealReal clearly can dominate. And as we’ve seen with Etsy recently — who squashed competition from no less than Amazon (NASDAQ:AMZN) — and eBay, who outcompeted numerous auction sites last decade, marketplaces tend to become winner-take-all. REAL stock is set up to be that winner.
The Risks are REAL
That said, there are three broad risks here.
The first involves margins. RealReal offers end-to-end service. It allows consignors to drop off goods in major markets or receive an in-home consultation. It authenticates the products. REAL employees write the ad copy and take the pictures.
Essentially, RealReal employees do all the work that eBay or Etsy sellers usually perform. Obviously, the company is paid for that work: it takes a much larger commission than either platform. But it also results in a labor-intensive model. In fact, RealReal Inc has nearly as many employees as Etsy with less than one-fifth the GMV. How high margins can go remains questionable. That means RealReal may not be as profitable down the line as other platform plays.
The second worry is returns, which the company receives a large amount. Customers returned 29% of REAL’s GMV in 2018, including a spike during the holiday season. And that figure has increased in recent years.
Certainly, it’s not as if RealReal necessarily is eating those losses. The company does take on some inventory if a return comes after the seller has been paid. But it appears REAL generally can move that inventory: its accrual for losses on that front was about $11 million at the end of 2018. Still, that’s over 5% of revenue, representing another potential pressure point on margins.
Finally, there’s the question of what growth looks like when the economy turns. Does RealReal in a recession benefit from even higher-end consumers looking for bargains? Or does it see a flood of used merchandise that arrives at the same time buyers are foregoing luxury purchases? If the latter, RealReal’s business model is much more cyclical than eBay’s or even Etsy’s (which has lower price points). That could be a problem.
Place Your Bets on REAL Stock
Reasonable investors can see the case for REAL stock quite differently. Indeed, shares have been volatile after a post-IPO pop. And just on this site, Chris Lau took a bearish view, while Luce Emerson projected significant upside ahead. Both authors make good points.
From here, REAL looks attractive, but not quite compelling. It’s hard to tell what the business looks like at scale. And while REAL stock looks reasonable relative to peers, I’d also question whether those peers themselves are reasonably valued in a market at all-time highs. Personally, I’d like to see a few more good quarters or a valuation that provided a discount to rivals.
Still, there’s a path to upside here and an intriguing business available at a reasonable valuation. As far as growth stocks go, that’s a good combination. It’s also one that suggests that if RealReal can execute, REAL stock at $25 may prove to be a bigger bargain than even the best items on the site.
As of this writing, Vince Martin has no positions in any securities mentioned.