What a brutal six months it’s been for The Real Brokerage. The stock has dropped 27.1% and now trades at $4.09, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in The Real Brokerage, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Despite the more favorable entry price, we're cautious about The Real Brokerage. Here are three reasons why you should be careful with REAX and a stock we'd rather own.
Why Is The Real Brokerage Not Exciting?
Founded in Toronto, Canada in 2014, The Real Brokerage (NASDAQ:REAX) is a technology-driven real estate brokerage firm combining a tech-centric model with an agent-centric philosophy.
1. Operating Losses Sound the Alarms
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
The Real Brokerage’s operating margin has risen over the last 12 months, but it still averaged negative 2.1% over the last two years. This is due to its large expense base and inefficient cost structure.
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
The Real Brokerage’s earnings losses deepened over the last five years as its EPS dropped 3.8% annually. We tend to steer our readers away from companies with falling EPS, where diminishing earnings could imply changing secular trends and preferences. Consumer Discretionary companies are particularly exposed to this, and if the tide turns unexpectedly, The Real Brokerage’s low margin of safety could leave its stock price susceptible to large downswings.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
The Real Brokerage has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.4%, lousy for a consumer discretionary business.
Final Judgment
The Real Brokerage isn’t a terrible business, but it doesn’t pass our bar. Following the recent decline, the stock trades at 17.6× forward EV-to-EBITDA (or $4.09 per share). This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of The Real Brokerage
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