Become a Member

De-teased Barshay’s “#1 Stock to Own over the Next Three Years”

What's Empire Market Insider pitching as "a DOUBLE – or Even a Quadruple – on This Tiny $4 Re-commerce Play"?

Berna Barshay runs a pretty new high-priced newsletter called Empire Market Insider for Empire Financial ($2,000 first year, renews at $3,000/yr, no refunds), and I haven’t looked into it before, so when she put out a new teaser pitch last week as bait to lure some new subscribers I decided to put the Thinkolator on the case…

… and it didn’t hurt that she name-dropped Warren Buffett and Charlie Munger, which helped her pitch catch my eye, though big companies like Berkshire Hathaway are not her bailiwick (she says she’s focused on “finding unique small-cap investment opportunities in consumer-led sectors like e-commerce, tech, and retail that Wall Street often overlooks”).

Here’s the headline from her ad:

“The Most Shocking Takeaway from Last Month’s Annual Berkshire Meeting

“Spoiler: It didn’t come from Warren Buffett, Charlie Munger, or any of the company’s chairmen, but it could help boost your portfolio over the next three years…”

Can’t say I know what “or any of the company’s chairmen” means, Berkshire Hathaway has just the one Chairman of the Board, like most companies, and that’s still Warren Buffett, and Charlie is the one Vice Chairman.

But anyway, that’s really just there to grab some attention — Berna’s boss at Empire Finanial, Whitney Tilson, is a huge Buffett and Munger fan and a longtime Berkshire investor who always goes to the Berkshire meetings, and I imagine he brought all of the Empire folks this time around so they could bathe in that Berkshire vibe.

So what is this secret that Berna found at the meeting?

Apparently she talked to some regular people. This is what she says:

“The biggest investment idea I took from this meeting didn’t come from Buffett, Munger, or any of Berkshire’s other vice chairmen…

“It came from Berkshire’s shareholders…

“Main Street Americans who’ve sacrificed, saved, and invested to get to the place they are now – only to get SLAUGHTERED by 2022’s ferocious market downturn.

“They said to me…

“‘I know the tech bubble has burst. I know it’s unreasonable to expect any stocks to go up 20X… 10X… or even 5X in the short term. I just want a stock that will make up for al the red I’m seeing in my portfolio. Something to help put it [in] profitable territory again.'”

Well, if those people were at the Berkshire meeting and own Berkshire shares, that’s one easy place to look. Berkshire Hathaway (BRK-B) shares are off their peak but still up this year, with a gain of about 5% while the S&P 500 is down 13% and the Nasdaq 100 is down about 22%, and they’ve beaten the broader market over the past five and ten years by a healthy margin — and while it’s obviously still a stock, and can certainly go down for lots of reasons, I’d say the risk of a dramatic collapse is lower at Berkshire than at just about any company I can think of.

But no, Berna was inspired to look elsewhere. Here’s what she says:

“… when I went back to my hotel room that night, I immediately opened up my Bloomberg account and SCOURED the market for a true ‘portfolio-fixer’ stock…

“I knew EXACTLY what I was looking for…

“I knew it wouldn’t be in crypto, cannabis, streaming, electric vehicles, or any other industry that dominated the headlines in 2020 and 2021 only to be hammered in the last few months…

“I knew it would be a company I’ve been following for at least a decade…

“It would have a solid management team with cutting-edge ideas for scaling their business – and whom I know personally…

“And it would also have a consistent history of generating revenue growth quarter after quarter with a clear path to profitability!”

Are you getting our free Daily Update
"reveal" emails? If not,
just click here...


OK, the idea of a “portfolio fixer stock” can be pretty dangerous, but we’ll bite — what is it?

Here’s her intro:

“I believe I’ve zeroed in on one of the best stocks to own over the next three years…

“It’s a tiny company positioned for massive growth over the next 24 months. Not to mention it ALSO…

  • Has proprietary technology that even Amazon couldn’t replicate (and if it tried, it would take it 10 years)…
  • Operates in an underfollowed niche area that has quietly outpaced the sector it is revolutionizing by 25 times over the past three years,… and…
  • Is on the verge of going mainstream – which could hand early investors at least a double – maybe even a quadruple – over the next couple of years.”

What other clues do we get about this little stock? It’s priced around $4 these days, she says that she has followed it for a decade, so the company has been around for a while, and she flew to Phoenix to meet with the CEO and tour their “brand-new warehouse” to see the company’s work firsthand… and it’s apparently quite secretive, more from the ad:

“Even though I know the CEO and CFO personally, they couldn’t risk me snapping any photos of what they were about to show me.

“That’s because they don’t want their competitors to see the operation they have set up… In fact, you can’t even find photos of their facility online.

“But as I toured this company’s warehouse – and got an up-close, in-person demonstration of its newest proprietary tech – I instantly knew I was on to something BIG.

“The company’s entire management team was there – the CEO, CFO, President, CMO, Head of Tech… everyone.

“They couldn’t wait to show me how their newly-developed tech is going to disrupt an entire $300 billion industry all on its own…”

So this is an e-commerce company, it’s doing something Amazon can’t easily do, and Barshay has a “gut feeling” about it being a truly game-changing innovation… other hints?

“Its business has improved drastically – but its stock has fallen dramatically. This is an incredible setup, which means that it could prove to be one of the best opportunities I’ve ever found for my readers.”

OK, but that’s true of a lot of stocks — the recent downdraft wasn’t caused by companies reporting bad results or becoming worse operators, it was caused by multiples falling as investors suddenly decided they no longer wanted to pay 50X sales to buy growth companies.

She also says this company has a “secret weapon” …

“A proprietary technology that it has spent the last decade building.

“Even if the biggest companies in the world like Amazon were to try to copy what this company’s created – they’d be a decade behind, which in the business world is an absolute eternity…

“What’s more, this company’s business model will make it virtually bulletproof to recessions… supply chain woes… and even rising inflation costs…

“So no matter what the market’s doing a year or even two years from now, you could make great gains off of this single $4 stock.”

This is a stock that she says is in a niche of the $13 trillion e-commerce sector… so what is it?

Apparently it’s all about authentication… and about resale, so this is a Re-commerce play. Which means it’s likely one of the marketplaces or platforms that’s growing in the big market for used items, probably luxury brand products and higher-end fashion items where authentication and “piracy” is a major challenge. That narrows it down quite a bit, but there are several high-profile online resale operations, from antiques and housewares to handbags and gowns to collectible sneakers and sports memorabilia.

So how does this company do better authentication? There’s another clue or two in this bit from the ad:

“Not only is this technology able to authenticate specific items by weeding out fake merchandise for these retailers…

“…but it allows them to authenticate these items at scale.

“Before it was ready, this little-known company was only able to authenticate products based on just two attributes…

“Now, it can review 50-plus attributes at once!

“That leads to a tremendous increase in accuracy AND efficiency!

….

“Plus, it has also been adding more and more proprietary data every day – 25,000 new items authenticated every 24 hours to be exact!

….

“All while weeding out more than 100,000 counterfeit items, to boot!”

Other hints? We get a little clue about the size:

“They’re also in a position to more than double their revenues to well over $1 billion dollars in just the next few years.”

OK… so we know that they have revenue below half a billion dollars. And if “the next few years” means three years, then to double in that time you’d need average growth of about 25% a year, so presumably the growth rate is somewhere a little above that.

And that’s about it, that’s what we get for clues — it’s a re-commerce play, priced around $4, and we have some hints about specific claims for their authentication process. Where does that lead?

Thinkolator sez that Barshay today is teasing TheRealReal (REAL) as her “#1 Stock to Own Over the Next Three Years.”

Most of the matches for the pitch can be found in TheRealReal’s Investor Day presentation from last month — the authentication system they use relies on intelligent screening of 50+ attributes now in their machine learning model, they say, up from two attributes in the previous, manual process. They claim to be making some progress in scaling their authentication work, particularly by applying machine learning to inspect photos of handbags in their system, since that’s a major product area where fakes are plentiful.

And yes, the price was right around $4 a couple weeks ago, and is around $3 right now (the ad has been running for a week or so, and they take some time to put together, so the price for a lot of ads is a little out of date right now). And last year, they had $468 million in revenue, with analysts estimating top-line growth of almost 30% this year, and 35-40% going out several years. It also, to continue to dot our i’s, their newest distribution center is indeed in Phoenix.

What is TheRealReal? It’s essentially a gigantic consignment shop for high-end luxury products, they recruit sellers to sell their used luxury items, which, yes, include sneakers and collectibles and trading cards in addition to the core products like handbags, watches and jewelry, and the seller earns a percentage of the sales price as their “commission” — for a $10,000 Rolex or handbag, the seller earns a big share, 80-85%, for a lower-end item it might be between 50-70%, and for anything under $200 the percentage shrinks dramatically. They only take well-known brands, and they say they authenticate every item they sell — they are obviously not perfect at it, since there are regularly stories like this one from Quartz a couple weeks ago: “Even top resellers like StockX and The RealReal are terrible at spotting knockoffs.”

The company is aggressively trying to improve its authentication process, it appears, and they say they’re a leader in that regard, and online marketplaces are one of the areas where true “network effects” come into play — the best platforms have the most buyers, which attracts more sellers, which means they continue to have the best selection of products, which attracts more buyers… so these kinds of companies have an innate appeal if they can become the real leader of a niche market and prove that their business can be profitable and sustainable.

Is TheRealReal there now? That seems to be the assessment of Barshay, who has been covering retail and consumer stocks for a long time so may have a better handle than I do. I haven’t looked at the company before, or at any of their competitors, but there are a surprising number of companies in this “re-commerce” sector — ThredUp (TDUP) has a similar business model, but with a lower-end thrift store vibe, 1stDibs (DIBS) is similar to REAL but focuses more on interior designers, art and antiques, Poshmark (POSH) sells a lot of the same things but really acts only as middleman, without taking possession of the items, and there are dozens of competitors that are smaller and not public (Fashionphile, Tradesy, Rebag, Vestiaire, Grailed, Reliked, etc.). Network effects mean this is the kind of business that, not unlike eBay or Etsy, should naturally trend to being a ‘winner take most’ business, but nobody has really done that yet in a broad way across all the popular re-commerce product lines, so the judgement has to be somewhat qualitative. Most of the stuff I read indicates that REAL, TDUP and POSH are the three leaders now.

REAL is currently the fastest grower in that bunch — their gross merchandise volume grew by 31% in the first quarter (year over year) to $428 million, resulting in $147 million in revenue, and they are targeting continued top-line growth of at least 30% a year, and their margins are improving as they grow. Their costs rose even as revenue was surprisingly high last quarter, so they lost a bit more money than analysts had expected and the stock was hurt, but they remain pretty optimistic about the very high growth rate continuing. Their “Vision 2025” goals include reaching “adjusted EBITDA” profitability in 2024 and gross merchandise volume of $5+ billion in 2025, and that seems within reach if they keep up the current pace — they are telling us they expect to sell about $2 billion worth of goods this year, for revenue to REAL of about $650 million (remember, they’re consigners — so most of the revenue goes through to the sellers as commissions), and that they will have “negative adjusted EBITDA” of about $90 million.

That makes them similar in size as Poshmark (POSH), which seems to be their real competitor in the luxury space. POSH, which calls itself a social marketplace, is growing more slowly but is a little larger — they had gross merchandise volume of $493 million in the quarter, but grew that number by only 12% year over year. And POSH is a somewhat simpler business, since they really just charge marketplace and transaction fees instead of actually buying and warehousing and distributing items (that’s an oversimplification), but their cut of the business is still pretty large, their revenue was $91 million, about 20% of the GMV. Not as impressive as the 30-40% that REAL earns as a more active consignment manager, and one which has actually moved beyond e-commerce to build out local consignment stores in high-traffic areas to supplement their online distribution, but that’s still a pretty high margin for a marketplace.

I’m probably the last person to opine on which luxury handbags and collectible sneakers and designer jewelry marketplace is more appealing, or which company has a better counterfeit detection strategy…. but as a business, REAL seems more attractive to me because of its better growth, even though POSH is slightly closer to break-even (and actually made a profit in the boom year of 2020, though is unlikely to do so again anytime soon).

I did look at 1stdibs a few months ago when the Motley Fool was pitching the idea, and I confess that I am much more impressed with the strategy and potential at REAL than at DIBS. So I guess I’d take REAL over the others if forced to choose today… partly because their strength in handbags seems to be in the perpetual hot spot of the luxury resale market, but mostly because their growth and potential for margin improvement look more appealing, including with the physical reinforcement of the brand from their physical resale locations, and they are relatively inexpensive compared to the size and growth rate of their gross merchandise volume… but, again, that’s a pretty quick judgement call from someone who is inexpert in this arena, and I haven’t bought any of them.

So… maybe you’ve got more of a handle on this business, or even have some experience as a customer or consignor, and maybe you see stronger differences between TheRealReal, 1stdibs, ThredUp, Poshmark and others that drive you to prefer one of the others over this one, or think one has a stronger brand or reputation than the others. Feel free to opine with a comment below, I’m sure I could learn from many of you.

P.S. Berna Barshay’s newsletter is pretty new to the marketplace, so our readers would like to know how it’s going — if you’ve subscribed to Empire Market Insider, please click here to visit our reviews page and let your fellow readers know what you think.

Disclosure: Of the companies mentioned above, I own shares of Berkshire Hathaway. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.

Irregulars Quick Take

Paid members get a quick summary of the stocks teased and our thoughts here. Join as a Stock Gumshoe Irregular today (already a member? Log in)
guest

12345

This site uses Akismet to reduce spam. Learn how your comment data is processed.

12 Comments
Inline Feedbacks
View all comments
mattremote
June 2, 2022 12:23 pm

Going to ask the boss to try out the web sites and tell me what she thinks of REAL, POSH and several competitors.

👍 120
Lighthouse
June 2, 2022 12:46 pm

My retired retail executive wife recently found Posh and apparently loves it, as I am wearing some articles of clothing she ordered. But I know nothing about the fundamentals.

papapenguin
papapenguin
June 2, 2022 1:26 pm

Can’t help but be a little wary when most of RealReal officers sold shares on May 20 -24 when, apparently, the stock broke $3.00. Small percentages of total owned, but confidence inspiring?

👍 1
👍 21718
elton
Member
elton
June 2, 2022 3:39 pm

Just took a look at TheRealReal.com and the site is basically blocked unless you sign up. An obnoxious business practice that doesn’t inspire confidence.

Kris Tuttle
Member
June 2, 2022 4:54 pm

Ha! This is a rare case where I figured this one out on my own. I have followed the company since the IPO so I knew what she was talking about right away. I was surprised how much conviction she had so I took a fresh look and wrote it up. There’s a paywall but the gist of it is that their model is very expensive and they are losing a lot of money every quarter. They might be able to get to positive cash flow before they run out of cash but I’m not sure. They already have convertible debt. Management has also lowered its expectations for long-term profitability since the IPO. If they can successfully automate more of the process including authentication without hurting quality then maybe margins can expand more quickly. At $3 it’s pretty washed out and maybe an M&A target for their customer base which is probably worth the current market cap. In case any of you are IPO Candy members here is the link: https://ipocandy.com/the-realreal-broken-candy/

Add a Topic
636
Add a Topic
1772
👍 166
Gordon Berger
Gordon Berger
June 2, 2022 5:03 pm

I’m just thinking that if I had a $10,000 Rolex to sell, I’d rather consign it to a firm like POSH that just takes consignment fees than sell it to REAL for 20% of the item’s value.

Add a Topic
Luxury Reselling firms
👍 21718
bunion132
June 2, 2022 6:59 pm

This time I remembered to check the short interest on a recommended stock sleuthed out on Gumshoe. Here’s my brokerage house’s info on REAL in that regard:

Institutional Ownership 88.56%

Number of Floating Shares 91.3 M
Short Interest as % of Float 15.43%

Would it be correct to say that, despite high institutional ownership, the institutions themselves are not convinced that this is a stock with a promising future, hence high short interest?

Add a Topic
5166
👍 441
👍 21718
barkerooney
Member
barkerooney
June 3, 2022 4:06 am

Thanks for the analysis Travis, always interesting to be introduced to a new element of the market.

👍 58
ironmac
Irregular
ironmac
June 3, 2022 4:29 am

I had this and sold in the fall of last year for quite a substantial loss. The model is good but the scaling of it, as in the number of experts, was making it difficult for them to grow quicker.

👍 83

We use cookies on this site to enhance your user experience. By clicking any link on this page you are giving your consent for us to set cookies.

More Info  
34
0
Would love your thoughts, please comment.x
()
x