Trading Opportunities for December 28, 2020: The RealReal (REAL)



A few months back, I told Daily 10X readers about an under-the-radar luxury fashion e-commerce platform by the name of Farfetch (NYSE: FTCH), and claimed that the company was the emerging “Amazon of Luxury Fashion.”

The bull thesis was pretty simple.

Covid-19 has provided an impetus for the retail market to accelerate its digital transformation, and fully leapfrog into the modern e-commerce era.

Of course, this acceleration has been and will continue to be much more pronounced for the segments of retail that were not digitized before the pandemic, because these retail categories are quite literally being forced to go from 0 to 100 almost overnight.

Think home goods… autos… even home-buying… the mass and rapid digitization of these formerly physical-first shopping categories represents an enormous opportunity for investors.

One of the more attractive opportunities in this megatrend is the digitization of the luxury fashion market.

It’s huge ($332 billion in 2019). It’s supported by secular demand drivers (~5% average growth in sales over the past several years). And it’s exceptionally underpenetrated when it comes to e-commerce (just 12% e-retail penetration in 2019).

Thus, over the next 10 years, we are going to see a multi-hundred-billion-dollar shift in luxury fashion from selling in-store, to selling online.

To play this shift, we told you about Farfetch, a company that we felt was turning into a mini-Amazon.

But Farfetch won’t be the only big winner as a result of this multi-hundred-billion-dollar shift in luxury fashion…

Today, we will tell you about another way to play the luxury fashion e-retail megatrend. It’s by buying a lesser known, smaller e-commerce platform that is emerging as Farfetch’s twin in the huge used luxury fashion market.

A Disruptive Force in Used Luxury Fashion on the Cusp of an Enormous Turnaround

Farfetch is an e-commerce platform used mostly for the sale of new luxury fashion products. If you want to buy a new Gucci purse or pair of Prada sunglasses, you’re going to go to Farfetch.com, hence the “Amazon of Luxury Fashion” title.

But what if you want to buy a used luxury fashion product?

Much like the auto market, the luxury fashion market has a huge used and resale segment that measures nearly $200 billion in the U.S. alone.

Why so big? Because luxury fashion products are expensive. Arguably too expensive. And therefore, there is ample demand to buy discounted, pre-owned luxury fashion items.

For all those items, shoppers don’t go to Farfetch…

They go to The RealReal (NASDAQ: REAL).

The RealReal is basically the Farfetch of used luxury fashion. The company operates an e-commerce platform which sells used Gucci purses, Prada sunglasses, and the like, by connecting people looking to sell their pre-owned luxury fashion items with people wanting to buy those items. The RealReal makes money by taking a commission on each sale that happens through its platform.

It’s a genius business model.

Lots of folks own still-very-valuable luxury fashion products that they don’t intend to use again. At the same time, lots of folks love luxury fashion products, but don’t want to pay thousands of dollars for a purse. By connecting those two sizable parties through a seamless, always-on, and hyper-convenient digital marketplace, The RealReal is providing tremendous value to a ton of people in the luxury fashion world.

From that basis alone, The RealReal projects as a long-term winner.

Indeed, for many years, The RealReal was on a hypergrowth trajectory that screamed “long-term winner.” Revenues at the company rose 55% in 2018, and by another 49% in 2019.

But… as is the case with several hypergrowth companies… The RealReal has hit some growing pains.

Specifically, in late 2019, CNBC ran a scathing report on The RealReal which uncovered that the platform – which, as its name implies, strongly prides itself on authenticating luxury fashion products to ensure they are real – was failing to live up to its “100% real” promise, and actually selling quite a few fakes.

Then, in early 2020, the Covid-19 pandemic struck. Consumer spending dried up. Luxury fashion spending dried up. The RealReal’s growth rates plunged.

Net net, here we are in 2020, and after two years of ~50% revenue growth, The RealReal will be lucky to post even 2% revenue growth this year.

But it increasingly appears that in 2021, the company will move on from these growing pains.

On the authenticating front, The RealReal has spent a lot of time and money automating multiple business processes in 2020 – like copywriting and photo-editing – thereby freeing up more time for authentication. The idea is that with more time dedicated to authenticating items, the less mistakes there will be, and the closer the company will inch towards its “100% real” promise.

Meanwhile, on the Covid-19 front, highly effective vaccines are already starting to be distributed across the globe. By early-to-mid 2021, those vaccines will be widely accessible to the general populous – and at that point, you should see economic activity and consumer spending take a big leap back towards “normal.”

Zooming out… with The RealReal, you have a long-term winner that hit a rough patch in 2020, but is ready to bounce back in 2021.

This bounce back will not be small.

The RealReal’s market cap is just $1.8 billion. Farfetch – its closest analog – has a near $20 billion market cap. The addressable market for used luxury fashion in the U.S. alone measures about $200 billion.

Clearly, there’s enormous upside in this stock.

Indeed, there’s enough upside in RealReal stock that you may want to consider taking a position in this explosive turnaround story today.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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