The RealReal Inc. (REAL) in an online marketplace for luxury consigned goods. The company’s services have been a big hit with  Millennial and Gen Z consumers. As a result,  REAL’s shares have gained 24% over the past year.

However, because people are now shifting their focus toward brick-and-mortar stores amid the reopening of economies, and because most e-commerce stocks are trading at expensive valuations, e-commerce stocks have been witnessing a downtrend. This is evident from Global X E-commerce ETF’s (EBIZ) 6.5% decline over the past month.

Also, REAL has an ISS Governance Quality Score of 8, implying relatively high governance risk. These factors combined have caused REAL’s stock to plummet 21% year-to-date, and 33.3% over the past month.

Here’s what could shape REAL’s performance in the near term:

Industry Headwinds

A recent NY Times article reported that nearly 84% of the U.S. population has received their first dose of a vaccine, which is ahead of President Biden’s goal of  vaccinating 70% of the population on or before July 4. Consequently,  the CDC has lifted its  masking recommendation  for fully vaccinated people in moderate crowd settings. Following this, major retail outlets have removed their masking policies for fully vaccinated customers.

Retail shops have reported rising foot traffic over the past couple of months as people return  in-person shopping at the expense of  online deliveries after more than a year of social distancing. As the inoculation rate increases in the coming weeks, the e-commerce industry could witness further declines in traffic, resulting in depressed sales margins for companies like REAL.

Poor Financials

REAL’s trailing-12-month revenue was $320.74 million, indicating a slight decline year-over-year. However, its EBITDA stood at negative $180.72 million, translating to an EBITDA margin of negative 50.07%. Its net loss and loss per share amounted to $193.32 million and $2.19, respectively. Its net income margin, ROE, ROA and ROTC came in at negative 60.27%, 74.83%, 16.61% and 19.76%, respectively.

REAL has been bleeding cash from its operations. Its trailing-12-month net operating cash flow stood at negative $127.26 million, while its levered free cash flow was negative $85.22 million. Its levered free cash flow margin stood at negative 26.57%.

Unfavorable Analyst Sentiment

Analysts expect REAL’s EPS to remain negative until at least 2022. Its consensus EPS estimates indicate a 14.3% year-over-year decline in the current quarter (ending June 2021), and a 4.9% slump in the next quarter (ending September 2021). REAL has a poor earnings surprise history and  missed the Street’s EPS estimates in three of the trailing four quarters.

A $225.55 million consensus revenue estimate for its fiscal year 2021 indicates a 49.4% improvement year-over-year.

POWR Ratings Reflect Bleak Outlook

REAL has an overall F rating, which equates to Strong Sell in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

REAL has an F grade for Sentiment, and D for Value. The poor revenue and earnings growth estimates justify the Sentiment grade. Also, in terms of forward Price/Sales, the stock is currently trading at 3.13x, which is 123.7% higher than the 1.4x  industry average, which is in sync with its Value grade.

In addition to the grades we’ve highlighted, one  can view REAL’s Ratings for Stability, Momentum, Growth and Quality here. REAL is ranked #65 in the Fashion & Luxury industry.

Better than REAL: Click here to learn about top-rated Fashion & Luxury stocks

Bottom Line

Despite the recent industry pullback, REAL’s current price makes it significantly overvalued. Moreover, the company’s declining earnings growth estimates and weak position in a highly competitive industry make it best avoided now.

REAL shares were trading at $15.79 per share on Thursday afternoon, up $0.36 (+2.33%). Year-to-date, REAL has declined -19.19%, versus a 11.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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