Concerns for The RealReal Look Authentic

No-moat The RealReal’s REAL challenge is stout: getting lean quickly while generating enough growth to service nearly $450 million in convertible debt coming due in 2025 ($169 million) and 2028 ($281 million). After digesting quarterly results, we see little impetus to meaningfully change our $2.52 fair value estimate, leaving shares of the Very High Morningstar Uncertainty company trading at a steep discount to our intrinsic valuation.

Quarterly results were blissfully uneventful, with the firm making strides toward profitability—seeing its diluted EPS loss of $0.39 edge our $0.49 loss forecast as the firm pulled back sharply in its less-profitable first-party sales business—and seeing consolidated revenue of $160 million clock in within a hair’s breadth of our $161 million estimate. Nevertheless, we harbor meaningful concerns regarding demand deterioration, and, by extension, the firm’s ability to achieve its 2024 adjusted EBITDA profitability target (we expect adjusted EBITDA profitability in 2025). A slowing cash burn rate marks an encouraging first step, but we still expect The RealReal’s ability to service its upcoming obligations to hang on dilutive equity issuance. More concretely, with our forecasts suggesting a free cash flow loss until 2027, and with just $294 million in cash and equivalents on the balance sheet, we expect that the firm will need to seek an infusion of external financing, a dilutive proposition for current investors.

On a positive note, the firm’s emphasis on more profitable third-party consignment sales, optimizing pricing, and reining in costs, strikes us as the appropriate chords to play against the current backdrop, though we expect slower near- to medium-term growth as a consequence. In the long run, brand marketing investments and a physical estate will likely be prerequisites to capturing leading market share in the U.S. luxury resale market, which we expect to roughly double over the next five years (to $35 billion).