Investing.com -- Shares of RealReal (NASDAQ:REAL) surged over 13% on Monday following an upgrade by Wells Fargo (NYSE:WFC) to an "overweight" rating, accompanied by a substantial increase in its price target from $4 to $15.
Wells Fargo analysts cited structural and strategic changes within the company as the basis for their optimism, positioning RealReal as a promising turnaround story in the e-commerce and luxury resale space.
Wells Fargo flags RealReal's pivot from its previous "growth at all costs" strategy to a more profitability-focused approach under new leadership.
The analysts said that adjustments in the company’s business model, including a revamped consignment take-rate structure and a shift away from low-margin direct sales, have materially improved its margin profile.
Specifically, RealReal increased its take-rate for items valued under $100 to 80%, enhancing the profitability of lower-value transactions while incentivizing consignors to supply higher-value goods.
As a result, gross margins for consignment have improved to about 75%, compared to less than 60% two years ago.
Another key driver of the stock's upgrade is the rebalancing of RealReal’s revenue mix. Direct sales, which constituted over 30% of revenue during the pandemic, have been reduced to less than 10%, allowing the company to refocus on its high-margin consignment model.
This shift has streamlined operations and reinforced profitability, enabling RealReal to achieve positive adjusted EBITDA for the first time since its IPO in 2019.
The Wells Fargo note also addressed prior concerns about RealReal's debt load. Earlier this year, the company executed a debt exchange, extending the maturity of most of its 2025 notes to 2029 while reducing its overall debt by $17 million.
This maneuver is expected to alleviate near-term financial risks, providing the company with greater flexibility as it works toward generating positive free cash flow by fiscal year 2025.
Wells Fargo analysts underscored the improving fundamentals, stating that the stock’s valuation does not yet reflect the ongoing operational and strategic progress.
They anticipate sustained double-digit revenue growth, driven by the luxury resale market’s favorable macroeconomic trends and RealReal’s strengthened competitive position. Analysts see risks, but they believe the company's management can pull off the turnaround.