Wells Fargo recently initiated coverage on this luxury consignment website stock with an ‘Outperform’ rating. At the company’s current p/e, these shares look undervalued.
The RealReal, Inc. (REAL)
From Ian Wyatt’s Million Dollar Portfolio
Sales of luxury automobiles have weakened as more consumers opt for environmentally-friendly electric models. Even diamonds are becoming a tougher sale. Young consumers especially worry about the effects of diamond mining on the environment and the conflicts that illicit diamond sales fund.
At the same time, Millennials and Generation Z are struggling against the high cost of urban living and soaring rents. That makes anything too luxurious unaffordable.
The RealReal (REAL) aims to change that.
Essentially an online consignment store for used luxury goods, RealReal sells everything from high-end men’s and women’s fashion, watches and jewelry, even furniture and art.
The business model is actually rather genius. RealReal doesn’t actually have a fixed inventory cost, since it only pays consigners when and if an item sells. Its main fixed costs are warehouses to store the items it is selling on consignment. The company also employs a team of gemologists, watchmakers and brand experts who authenticate every item coming in.
That ensures buyers that they aren’t ponying up for counterfeits and ensures sellers that they get the best possible price. In exchange for its services, RealReal keeps between 15% to 60% of the sale price. That averaged out to 37% of sales in the second quarter, well ahead of its main competitor eBay’s (EBAY) roughly 9%.
Since it’s essentially recycling, RealReal helps address consumers’ concerns about sustainability. And the service is certainly easy to use. Depending on the types and volumes of items a consignor is selling, RealReal will send a team to the consignor’s home to assess, price and collect their valuables.
For buyers, it doesn’t get much simpler than shopping for the comfort of their own homes. And for the brand conscious, they can buy true luxury goods at (at least slightly) lower prices.
Even though RealReal was founded in 2011, it’s not yet profitable. It posted a loss of -$0.28 per share in the second quarter. Even under the rosiest scenario it isn’t likely to be profitable until 2022. That said, right now the stock is trading for just 3X its enterprise value, compared to 8X for Etsy (ETSY) and 4X for eBay.
On top of that, luxury market analysts estimate that RealReal as a 14% share of the $7 billon U.S. luxury goods market. They predict its market share is likely to hit 19% in the next couple of years.
The stock looks undervalued to me. In fact, if it achieves the predicted growth and is valued closer to its peers, that would value it closer to a $40 stock.
I also believe RealReal would fare well during a recession. It obviously hasn’t a trial-by-fire, but I would expect it to see an influx of sellers raising cash. I’d also expect it to find more buyers looking for a luxurious bargain.
Recommended Action: Buy RealReal up to $40.
Ian Wyatt, Ian Wyatt’s Million Dollar Portfolio, www.wyattresearch.com, September 27, 2019