The RealReal IPO Is A Solid Long-Term Investment

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About: The RealReal (REAL)
by: David Evans
Summary

The RealReal Inc., an online luxury reseller which is moving towards brick and mortar stores, has filed the initial paperwork for an IPO.

Secondhand luxury is increasingly popular as younger Americans look for luxury goods that are sustainable and at a good price.

The RealReal is unprofitable, but reports high revenue growth and has an acceptable debt load.

We currently do not know TheRealReal's planned valuation, but investors should value this company's long-term potential.

American online luxury reseller The RealReal Inc. (REAL) has made the first move towards an IPO, filing with a placeholder value of $100 million last week. This is a bargain price, in particular for long-term investors with a steady nerve.

CNBC reported that this company "was valued at $745 million in a funding round in July last year" and intends to list on the Nasdaq under the symbol "REAL." Expect this valuation to push north of $1 billion quickly. However, this shouldn't make you nervous. The RealReal operates in a luxury goods market which is set to see continued growth - fuelled by a younger generation of shoppers more accustomed to making purchases online.

The RealReal's CEO and founder is Julie Wainwright, who is best known as the CEO of the infamous Pets.com. Failures like Pets.com can be a valuable learning experience, and The RealReal appears to be a much stronger company with good fundamentals and opportunities for growth. Here are some of the basic fundamentals about this company for investors to understand.

Online Luxury Reselling

The idea of purchasing secondhand luxury goods may unnerve some shoppers who fear buying counterfeit goods or want to own such goods firsthand. But the secondhand luxury market is, in fact, one of the fastest-growing segments of the secondhand market, in part fueled by a younger generation which prizes reusing goods due to economic and environmental concerns. Instead of feeling humiliated by poking around a secondhand store, customers feel clever looking for the best deal. The RealReal states in its SEC filing that "The total addressable market of luxury products in U.S. homes" is worth approximately $198 billion.

The RealReal steps into this market by operating through consignment. Ordinary individuals will drop off their luxury goods at set locations, and a substantial percentage of these goods will still have their tags. The RealReal employees inspect the goods to ensure they are authentic and in good condition. Then, the goods are stored in fulfillment facilities until a customer orders them online.

The RealReal primarily operates online, but like other online stores has been expanding into brick and mortar with stores in New York and Los Angeles. Brick and mortar luxury stores have traditionally had an advantage over online stores in that customers were reluctant to spend thousands of dollars online. But as we get more used to online shopping, that reluctance is fading away.

Actual luxury brands may still have their doubts, which can be shown by the fact that Chanel filed a lawsuit against The RealReal last November alleging that The RealReal had sold counterfeit Chanel handbags, which The RealReal has aggressively denied. And The RealReal faces stiff competition from other secondhand vendors as well as discount chains.

Growth and Finances

But like most IPOs, RealReal can point to rapid financial growth. Revenue rose from $133.8 million in 2017 to $207.3 million in 2018, a growth rate of about 55%. RealReal is making a gross profit, and the gross profit margin stayed at around 65% in both years.

RealReal does report increased net losses from $52 million in 2017 to $75 million in 2018, as well as negative cash flow. This is primarily due to increased expenses. What is notable about these expenses is that RealReal's marketing expenses only rose by 15%, in comparison to operations and technology expenses which rose by 79%.

A low marketing expense increase, combined with high revenue growth, indicates that RealReal is doing an excellent job at attracting new customers and keeping repeat ones. RealReal states that the higher operations expenses are due to "investments to support our growth and drive long-term operational efficiencies, including investments to significantly expand our merchandising and fulfillment facilities, enhance our technology, open our first retail stores and grow our talent."

Other financial metrics appear solid as well. RealReal reports that as of March 31, 2019, it had $100 million in total liabilities balanced against $88 million in cash and $187 million in total assets. It has shown a consistent ability to raise funds, with CrunchBase reporting that it has raised $334.6 million over nine funding rounds.

Making a Decision

CNBC reported that RealReal had a valuation of $745 million last July, and this company will easily pursue a valuation north of $1 billion in this IPO. Without a concrete figure, we cannot state for the moment whether it will be a value buy.

But even if RealReal quickly becomes an expensive stock, there are lots of reasons to think this could be a good company to hold over the long term. The younger generation wants more luxury goods at a reasonable, sustainable price, and is growing more accustomed to buying such goods online. RealReal has shown an ability to grow, attract investor interest, and has a reasonable debt load.

There have been plenty of unicorns over the past 12 months which leave investors jumping in post-IPO holding the bag while the institutional investors laugh their way into the bank. At the very least, The RealReal appears to be different as a solid long-term stock which investors should pay attention to during the roadshow period.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.