The RealReal: Investors Should Take Profits After Unexpected 40% Surge

Key Morningstar Metrics for The RealReal

• Fair Value Estimate: $2.25
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

The RealReal REAL saw its shares surge more than 40% during Dec. 9 trading, reflective of a massive price target increase from a competing sales side firm, as reported by MSN. The report correctly credits the beleaguered e-commerce company for improving gross margins in its consignment business, now registering roughly 75%, up from 60% pre-pandemic. Meanwhile, the company has increased its take rate on low-value goods and worked to widen its mix of more profitable big-ticket items.

We maintain that The RealReal’s cost-cutting efforts undermine its long-term competitive position. Few firms can cost-cut their way to growth, and an onerous fee structure (with striking 80% commissions on items sold at sub-$100 price points and an uncompetitively high 30% take rate on products sold at north of $5,000) are liable to continue funneling sellers toward more price-competitive self-service options like eBay EBAY and Poshmark. Those firms’ authentication investments render them increasingly viable substitutes in a competitive luxury resale market. Further, The RealReal’s marketplace has always been supply-constrained, with a 91% sell-through ratio in 2022 and 92% in 2023. We therefore view any monetization efforts that disincentivize incremental listings as a substantial issue in the winner-take-most e-commerce space.

While we expect The RealReal to achieve profitability (if not until 2028), attributable to a mix shift toward exceedingly profitable third-party consignment sales and a declining mix of first-party sales (which skew toward product gaps like hard luxury), it comes at the expense of growth. We maintain our estimate of an 11.2% compound annual growth rate in GMV between 2023 and 2028, below ThredUp’s TDUP online resale market growth estimate of 17.1%, suggesting ongoing market share losses. As we elect to maintain our fair value estimate of $2.25 per share, we encourage investors to take gains at current prices.