What a time it’s been for The RealReal. In the past six months alone, the company’s stock price has increased by a massive 96.9%, reaching $10.18 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is there a buying opportunity in The RealReal, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free for active Edge members.
Why Is The RealReal Not Exciting?
We’re glad investors have benefited from the price increase, but we're cautious about The RealReal. Here are three reasons why REAL doesn't excite us and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Examining a company’s long-term performance can provide clues about its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, The RealReal grew its sales at a sluggish 4.1% compounded annual growth rate. This wasn’t a great result compared to the rest of the consumer internet sector, but there are still things to like about The RealReal.
2. Customer Spending Decreases, Engagement Falling?
Average revenue per user (ARPU) is a critical metric to track because it measures how much the company earns in transaction fees from each user. ARPU also gives us unique insights into a user’s average order size and The RealReal’s take rate, or "cut", on each order.
The RealReal’s ARPU fell over the last two years, averaging 11.7% annual declines. This isn’t great, but the increase in active buyers is more relevant for assessing long-term business potential. We’ll monitor the situation closely; if The RealReal tries boosting ARPU by taking a more aggressive approach to monetization, it’s unclear whether users can continue growing at the current pace. 
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
The RealReal burned through $16.4 million of cash over the last year, and its $335.5 million of debt exceeds the $94.35 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the The RealReal’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of The RealReal until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
The RealReal isn’t a terrible business, but it isn’t one of our picks. Following the recent surge, the stock trades at 30.5× forward EV/EBITDA (or $10.18 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at one of our all-time favorite software stocks.
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