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3 Reasons REAL is Risky and 1 Stock to Buy Instead

REAL Cover Image

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 189%, reaching $9.36 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? Get the full stock story straight from our expert analysts, it’s free.

We’re glad investors have benefited from the price increase, but we don't have much confidence in The RealReal. Here are three reasons why REAL doesn't excite us and a stock we'd rather own.

Why Is The RealReal Not Exciting?

Founded by consignment store aficionado Julie Wainwright, The RealReal (NASDAQ: REAL) is an online marketplace for buying and selling secondhand luxury goods.

1. Declining Active Buyers Reflect Product Weakness

As an online marketplace, The RealReal generates revenue growth by increasing both the number of users on its platform and the average order size in dollars.

The RealReal struggled to engage its audience over the last two years as its active buyers have declined by 14.4% annually to 389,000 in the latest quarter. This performance isn't ideal because internet usage is secular, meaning there are typically unaddressed market opportunities. If The RealReal wants to accelerate growth, it likely needs to enhance the appeal of its current offerings or innovate with new products. The RealReal Active Buyers

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

While The RealReal posted positive free cash flow this quarter, the broader story hasn’t been so clean. The RealReal’s demanding reinvestments have consumed many resources over the last two years, contributing to an average free cash flow margin of negative 9%. This means it lit $9.04 of cash on fire for every $100 in revenue.

The RealReal Trailing 12-Month Free Cash Flow Margin

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 $3.44 million of cash over the last year, and its $548.3 million of debt exceeds the $153.2 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

The RealReal Net Debt Position

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 doesn’t pass our bar. Following the recent surge, the stock trades at 50.2× forward EV-to-EBITDA (or $9.36 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d recommend looking at one of the fastest-growing restaurant franchises with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of The RealReal

The elections are now behind us. With rates dropping and inflation cooling, many analysts expect a breakout market - and we’re zeroing in on the stocks that could benefit immensely.

Take advantage of the rebound by checking out our Top 5 Growth Stocks for this month. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Sterling Infrastructure (+1,096% five-year return). Find your next big winner with StockStory today for free.

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