Sustainable Fashion And Digitalization Will Transform Luxury Resale

Key Takeaways

• AI-powered automation and proprietary authentication could drive significant margin expansion and unlock new high-margin revenue streams from brand partnerships.
  
• Growing consignor base, re-commerce tools, and alignment with sustainable fashion trends position the company for sustained revenue growth above current market expectations.
  
• Ongoing losses, competition from automation and brands' own resale channels, and heavy physical infrastructure risk undermining The RealReal's growth potential and long-term profitability.

Catalysts

Operates an online marketplace for resale luxury goods worldwide.

• Analysts broadly agree AI adoption and authentication investments will moderately improve margins, but RealReal's accelerating rollout of Athena to 40% of all units and further AI-driven automation across pricing, listing, and operations could unlock far greater cost savings and scalability, driving a much larger expansion in net margins and EBITDA than currently forecast.
  
• Analyst consensus expects improved sales efficiency and high-value consignor acquisition, but the compounding effect of initiatives like experiential pop-ups, a growing store network, and seamless re-commerce tools such as Reconsign are already delivering record consignor growth and could drive a multi-year acceleration in supply and volume, thus supporting sustained double-digit revenue growth well above existing projections.
  
• RealReal is uniquely positioned to benefit from the accelerating shift among Millennials and Gen Z to sustainable, circular fashion, with more than half its user base under age 40, which positions the platform as the default destination for estate and generational asset turnover, and could enable compounding network effects, driving both gross merchandise value and recurring revenues higher.
  
• As luxury brands and aggregators increasingly seek partnerships with trusted resale platforms, RealReal's market legitimacy and proprietary authentication technology put it at the forefront of potential high-margin, co-branded inventory agreements, unlocking new revenue streams and improving inventory turn and pricing power.
  
• The primary luxury market's continued price escalation due to tariffs and inflation, combined with regulatory tailwinds favoring resale and recycling, will magnetize supply from the $200 billion in luxury items sitting in U.S. closets and materially boost both average order values and gross margins, supporting meaningful growth in top-line and bottom-line results.

RealReal Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on RealReal compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming RealReal's revenue will grow by 12.0% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -5.6% today to 0.9% in 3 years time.
• The bullish analysts expect earnings to reach $8.2 million (and earnings per share of $0.05) by about August 2028, up from $-35.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 318.5x on those 2028 earnings, up from -25.7x today. This future PE is greater than the current PE for the US Specialty Retail industry at 19.0x.
• Analysts expect the number of shares outstanding to grow by 5.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.49%, as per the Simply Wall St company report.

RealReal Future Earnings Per Share Growth

Risks

• Persistent difficulty in achieving operating profitability remains a key risk, as highlighted by ongoing negative operating cash flow and continued investments needed for logistics, authentication, and physical retail infrastructure, which threatens sustainable positive net margins and long-term earnings growth.
  
• Rising automation and AI in the authentication process may reduce The RealReal's unique value proposition in the luxury resale market, potentially compressing margins and exposing the company to increased competition from new tech-enabled entrants, putting long-term pressure on gross profit and EBITDA margins.
  
• Expansion of direct-to-consumer resale by luxury brands themselves and the trend of brands bypassing third-party platforms threatens to shrink The RealReal's available inventory pool and customer base, limiting sustainable revenue growth opportunities in the long run.
  
• Intensifying competition, not only from established resale platforms but also from social commerce and rapidly evolving digital channels, is likely to drive up customer acquisition costs and depress take rates, ultimately placing pressure on both top line revenue and long-term profitability.
  
• Heavy reliance on physical retail locations for sourcing and brand-building creates significant fixed-cost liabilities, making scalability more difficult during potential economic downturns, which could negatively impact EBITDA margins and rein in earnings during periods of weaker demand.

Valuation

• The assumed bullish price target for RealReal is $15.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of RealReal's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $15.0, and the most bearish reporting a price target of just $2.4.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $893.9 million, earnings will come to $8.2 million, and it would be trading on a PE ratio of 318.5x, assuming you use a discount rate of 9.5%.
• Given the current share price of $7.88, the bullish analyst price target of $15.0 is 47.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.