Rising Regulations Will Cripple Secondhand Luxury Despite AI Assistance

Key Takeaways

• Tightening regulations, rising compliance costs, and shifting demographic trends threaten profitability and revenue growth by pressuring margins and changing demand for secondhand luxury goods.
  
• Intensifying competition, persistent high operational costs, and luxury brands moving into resale risk eroding market share, inventory quality, and long-term growth prospects.
  
• Strategic focus on sustainability, automation, and partnerships positions RealReal for strong growth, improved margins, and market share gains in the evolving luxury resale sector.

Catalysts

Operates an online marketplace for resale luxury goods worldwide.

• With tightening online marketplace regulations and potential changes in consumer privacy laws, compliance requirements are likely to escalate, leading to higher operating expenses and increased customer acquisition costs. This would pressure both net margins and earnings over the long term.
  
• Demographic shifts and the transfer of generational wealth may result in changing luxury buying patterns and reduce future demand for secondhand luxury goods, threatening RealReal's ability to maintain its current double-digit revenue growth trajectory.
  
• Increasing competition from mass-market circular economy platforms and entrenched e-commerce giants is expected to siphon off both buyers and sellers, undermining RealReal's efforts to grow its active user base and compressing operating leverage, which could slow revenue growth and constrain future net income expansion.
  
• Persistent high logistical and authentication costs, not adequately offset by automation or scale, risk keeping gross margins subdued. Even with ongoing investments in AI and automation, there is a real possibility that processing times and unit costs will not improve at the pace needed to drive long-term profitability improvements.
  
• The trend of luxury brands vertically integrating into the resale market can further erode RealReal's access to premium inventory, making it harder to attract both sellers and buyers. This would likely limit inventory quality, suppress average order value, and stifle sustainable top-line growth.

RealReal Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on RealReal compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming RealReal's revenue will grow by 9.8% annually over the next 3 years.
• The bearish analysts are not forecasting that RealReal will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate RealReal's profit margin will increase from -5.6% to the average US Specialty Retail industry of 4.7% in 3 years.
• If RealReal's profit margin were to converge on the industry average, you could expect earnings to reach $40.0 million (and earnings per share of $0.29) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 10.9x on those 2028 earnings, up from -25.2x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 6.21% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.48%, as per the Simply Wall St company report.

RealReal Future Earnings Per Share Growth

Risks

• Rapid growth in new consignors and strong engagement from Millennial and Gen Z consumers, who prioritize value and sustainability, could drive sustained revenue and customer retention over the long term, potentially lifting both revenue and net earnings.
  
• Successful deployment of AI and automation, especially the Athena initiative, is already delivering significant cost savings and efficiency gains in processing and authentication, which may further expand net margins and improve overall company profitability as rollout accelerates.
  
• The company's strategic shift towards partnering with luxury aggregators, expanding internationally, and growing direct relationships with high-value suppliers could substantially increase high-quality inventory, elevating average order value and supporting multi-year revenue growth.
  
• Ongoing improvements in operational leverage, especially in sales and marketing efficiency, as demonstrated by lower operating expenses as a percentage of revenue, suggest the potential for higher operating margins and greater earnings growth in future periods.
  
• Macro trends such as increased mainstream acceptance of luxury resale and the regulatory shift towards ESG and circular economy principles could position RealReal as a preferred partner across the luxury ecosystem, enabling it to capture greater market share and strengthening both long-term revenues and profitability.

Valuation

• The assumed bearish price target for RealReal is $2.4, which represents the lowest 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be $842.2 million, earnings will come to $40.0 million, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of $7.73, the bearish analyst price target of $2.4 is 222.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.