Let's Be Real: The RealReal Stock Deserves Serious Consideration

In a sea of new e-commerce entrants over the past few years The RealReal (NASDAQ:REAL) may have gotten lost in the shuffle. Sure, more than 2 million shares exchange hands on a daily basis, but the fashion-minded online reseller hasn't quite received the red-carpet treatment from the market.

As the planet's biggest online marketplace for luxury goods, The RealReal has put together some solid growth figures since hitting the Nasdaq runway in June 2019. Yet a year and a half later the stock is selling around the same price as the IPO. This second chance sale may not last for long.

 What is The RealReal?

Founded by CEO Julie Wainright in 2011, The RealReal is the world's largest online storefront for authenticated luxury goods, i.e., the real stuff, not the counterfeit knockoffs. It sells vetted out luxury products offered by consignors, meaning the shipper or original owner, rather than the maker of the goods. In this way it serves as a trusted place to shop for high end women's, men's, and children's apparel as well as jewelry, watches, art, and home goods.

The company makes money by taking a cut of whatever goods it sells. The RealReal operates 11 luxury consignment offices in the U.S. and offers free "White Glove" pickup service for sellers in 40 U.S. cities. It also has six retail outlets in high disposable income cities New York, Los Angeles, and Chicago. All the products it resells are reviewed for authenticity at one of three authentication centers in California or New Jersey. To pull off this type of operation, The RealReal employs hundreds of brand authenticators including gemologists and horologists (watch experts, not the psychics).

Last year The RealReal processed 2.2 million orders and the average order size was $442. Its customer base is unique in that more than half of its consignors are also buyers. More importantly, over 80% of its business came from repeat buyers in 2020 when the company had of 649,000 active buyers.

How Did TheRealReal Perform in 2020?

The RealReal continues to be a beneficiary of the stay-at-home economy and the homebound consumer. People who have long put off dreaded closet cleaning projects are finally getting around to taking inventory of what they need and don't need. As designer clothing, boots, and purses get shuffled around the country, the top luxury resale market player is getting a big slice of the action.

While demand was solid throughout 2020, the supply side of the equation was a challenge. Safely getting a hold of product supply from sellers made it difficult for the company to keep up with demand through much of the year. Higher expenses related to COVID-19 also weighed on performance. This situation gradually improved as the year went on and by the fourth quarter inventory levels and financials picked back up.

A key performance metric for the business is Gross Merchandise Value (GMV), the value of goods transacted on The RealReal platform. In the fourth quarter, this improved 2.4% from the prior quarter as the impact of COVID-19 began to dissipate. What's more encouraging is that through the end of last week, GMV was up 14% year-over-year reflecting a strong start to 2021.

So, while The RealReal's full-year results were somewhat soft, improved performance in Q4 and strong start to 2021 are what should excite investors. The worst appears to be over and a turnaround in the business appears to be in full swing.

 Why is TheRealReal Stock a Buy?

TheRealReal operates one of the most unique e-commerce sites out there both in terms of the types of goods it sells and the way it brings together buyers and sellers. It is kind of like Etsy but for expensive paintings and fancy watches. As consumers of all budgets continue to accelerate their online shopping habits, growth at TheRealReal could really, really take off.

Looking past the current environment, there is a bigger growth opportunity at play. Frost & Sullivan estimated that the U.S. luxury goods resale market is a $198 billion opportunity. The biggest growth drivers are Generation Y and Generation Z consumers who have an affinity for buying better quality products at affordable prices. This trend along with a growing preference to shop for luxury items online falls right into The RealReal's lap. The company sits at the crossroads of growth in luxury retail, demand for second-hand goods, and online shopping. This should be a powerful place to be over the next several years.

The RealReal stock is well liked by sell-side analysts, 10 of which call it a 'buy' and none of which see it as a 'sell'. Ahead of earnings Piper Sandler called The RealReal a "top small cap idea of 2021" and bumped up their target price to a Street-high $33.

Despite being up 38% this year The RealReal is not on the radar of most growth investors. As big institutional players and more retail investors learn about the luxury resale story, the stock holds the potential to sprint higher as it laps past its IPO price.