What happens when a Canadian technology company lands 60% of its U.S. target market? Apparently, it loses the majority of its market capitalization.
That’s the story behind Real Matters Inc. (TSX: REAL), a Toronto-based technology management company that serves mortgage lenders and insurance providers. Since going public in 2017, Real Matters has lost nearly two-thirds of its market cap and now trades for less than your average visit to Starbucks (really, the average Starbucks consumer spends $6 per visit, which is more than what it costs to own a share of REAL).
Let’s talk about what makes Real Matters stock unique and whether it can bounce back from its meteoric drop.
Real Matters: An Introduction
As a network management company, Real Matters combines proprietary technology and tens of thousands of qualified field agents to create a marketplace for mortgage lending and insurance services. The total size of its addressable market or revenue opportunity is said to be $13 billion. Given its strong inroads into the U.S. market, sustainable growth could be part of its long-term value proposition.
If attracting the industry’s biggest clients is the definition of success, Real Matters ranks among the top. Although you may have never heard of it, Real Matters has onboarded 60 of the top 100 mortgage lenders in the U.S. and its client retention rate is up around 95%. Basically, the who’s who of U.S. mortgage lenders and insurance providers know Real Matters and do business with the company on a recurring basis.
All good things considered, the company’s share price has taken a beating since inception. That’s not exactly surprising given the overall state of the Toronto Stock Exchange but it should still ring alarm bells given how badly it underperformed the broader market.
The company’s fourth-quarter earnings report also showed weakness, with revenue from its U.S. appraisal market flatlining year-over-year. Mortgage originations were also estimated to have declined nearly 13% in fiscal 2018. Consolidated revenues were down 7% for the year.
From an earnings perspective, the company has been Adjusted EBITDA positive since fiscal 2012, according to the official website.
REAL Turnaround or Bear Trap?
2018 was a difficult stretch for REAL stock, but signs of a turnaround have finally materialized. Since the year began, REAL stock has gained more than 42%, easily outpacing the TSX and other comparable technology shares. The stock has also recovered nearly 60% from its record low in November, offering convincing evidence that the worst of the downturn has passed.
Although REAL is unlikely to maintain such an aggressive growth pace indefinitely, investors can expect the company to reclaim some of the lost market share incurred over the past year-and-a-half. The size of its addressable market is massive and efforts to grow its residential mortgage appraisal market share have also had positive results.
Given its strong foothold in the U.S. mortgage market, Real Matters is likely to respond to the Federal Reserve’s decision to adopt a more “patient” approach to monetary policy. On Wednesday, members of the Fed’s policy-setting board indicated that interest rates will remain on hold for the rest of 2019, a move that could ease pressure on the housing market. The central bank’s federal funds rate has an indirect impact on mortgage rates as banks and other lenders pass on costs (or savings) to their customers.
Real Matters has a solid business case and is dirt cheap. A rebound in the U.S. housing market may serve as a good proxy for how the company performs in the short- and medium-terms.