The quiet period for The RealReal Inc.’s underwriters ended Tuesday, and so far the results are mostly positive, with four “buy” ratings and two “holds,” according to Bloomberg data.
Analysts’ fundamental views of the online luxury reseller are overall positive. KeyBanc said the primary luxury market is nearly $300 billion and the market for accessible luxury might be more than two times that, with RealReal in a unique position to provide “marquee luxury brands at more accessible price points.”
Both KeyBanc and Bank of America Merrill Lynch pointed out the “competitive moat” that The RealReal operates in. It’s “unlikely that EBay and Amazon materially enter the category,” Bank of America wrote in a note.
Valuation and the path to profitability are holding some analysts back from coming out more bullish on the stock, which debuted last month. The stock is up about 24% since the initial public offering price of $20 a share. It was little changed at $24.75 at 10:24 a.m. in New York Tuesday.
Here’s a roundup of analysts’ initiation notes:
Cowen, Oliver Chen
“Premium specialization yields a bigger and better customer experience,” Chen wrote in a note in which he initiated coverage with an outperform rating.
RealReal has four main competitive advantages, Chen said: Advanced supply gathering capabilities and reach; sophisticated logistics and fulfillment infrastructure & authentication; advanced data analytics; and high sales velocity and sell-through rates.
His model calls for near-term revenue growth in high 20% range, which would make the company profitable by fiscal 2022. Long-term Chen expects about 20% revenue growth and an Ebitda margin of at least 25%.
In addition, “the luxury resale market provides an attractive backdrop as luxury consumption is shifting online and more younger consumers prefer resale,” he said.
Chen’s 12-month price target is $32 per share.
Credit Suisse, Michael Binetti
Binetti’s initial outperform rating is based on his view of the big addressable market opportunity, the company’s “conservative” revenue plan, and its “relative valuation cushion.” His price target is $30.
Credit Suisse estimates a total addressable market of about $195 billion of U.S. luxury second-hand supply, but that only $7 billion is consigned today — “largely in inefficient mom and pop consignment shops.”
The RealReal’s investments in a “full-service product sourcing model and 100% upfront authentication process are proving to be catalysts motivating wealthy consumers to resell their luxury goods online.” Binetti says this will drive revenue about the company’s long-term plan.
While RealReal’s plan to reach breakeven Ebitda margins by the fourth quarter of 2021 is a long way out, and the “‘profitability debate” is unlikely to be resolved soon, he sees the potential for revenue growth to “slightly” exceed the company’s plan.
KeyBanc, Edward Yruma
Yruma starts coverage with an overweight and a price target of $31.
“The primary luxury market is nearly $300B and we think that the accessible luxury market could be more than 2x this market size. REAL is unique in that it provides marquee luxury brands at more accessible price points.” Yruma believes luxury items at less expensive prices make up a “largely untapped and unsatisfied” market.
”One-to-one relationships with consignors via the ‘White Glove’ process,” the company’s in-home consultation and pickup service, will be hard for competitors to replicate, adding to The RealReal’s “competitive moat.”
Yruma will be closely watching brand relationships longer term. “Litigation is ongoing with Chanel, but other major luxury brands seem to be taking a more benign view on luxury resale,” he said. Eventually, brands will recognize the benefits of “higher closet velocity on first party demand, but this may take years to evolve.”
Raymond James, Aaron Kessler
For his positive fundamental view on the company, Kessler cites the shift online of the large luxury goods market and that there is increasing adoption of online luxury resale.
The RealReal is the “leading luxury resale marketplace, offering an end-to-end service for consignors and a trusted marketplace with large selection of unique items for buyers,” he says.
Kessler projects “25% plus” long-term growth, driven by increasing adoption of online resale, category expansion, strategic offline expansion, and international. He models about 25% long-term Ebitda margins, aided by “increasing variable and fixed-cost leverage.”
That said, his positive view is offset by valuation, as shares trade at a 2020 enterprise value/gross profit multiple of 7.3x, above the online marketplace and eCommerce group averages of 6.1x and 2.9x, respectively. He initiates coverage with a market perform rating.
Bank of America Merrill Lynch, Justin Post
“We see strong long-term demand trends and think the business will benefit from an operational moat, making it unlikely that EBay and Amazon materially enter the category,” Post wrote in a note.
That said, he believes the company may not break even until 2023 as its “salesforce-fueled supply model, item authentication and shipping capabilities have high fixed costs.”
The stock is “close to fairly valued,” he says. His initial rating is neutral, with a price target of $28. Post says shares are discounting three years of 30%+ growth and 20 points of Ebitda margin leverage that is in his model.