What happens to Real Matters if interest rates rise?

It’s been a roller coaster 12 months for Real Matters (Real Matters Stock Quote, Chart, News, Analysts, Financials TSX:REAL), whose share price took off about this time last year and more than doubled by last summer, only to fall back to right where the stock started. Is REAL now a buy? Possibly, says Jason Del Vicario of Hillside Wealth Management, but the true test for Real Matters will come when the real estate market heads south.

“They’re involved in the real estate market and real estate is, of course, hot right now because interest rates are very low,” said Del Vicario, speaking on BNN Bloomberg on Monday. “People are refinancing, people are upsizing, downsizing and we’ve got the whole millennial generation placing demand on the housing market.”

“[But] Real Matters doesn’t necessarily have the history that we’re looking for. I’ve looked at them in the past and I’ve come close to buying them but haven’t,” he said.

“I’d just like to see a bit more history and I’d like to see how they do in a housing downturn to really get a good sense for the strength of the business model,” Del Vicario said.

In the end, Real Matters could be a winner of a stock, according to Del Vicario, but investors should be aware that there’s significant risk on the table.

“If somebody’s got the tolerance for the risk with everything that I’ve said I would suggest sizing the position accordingly and keeping a close eye on it, but it looks promising,” Del Vicario said.

A network management services company with a cloud platform for businesses managing real estate processes such as appraisals, insurance inspections, title search and mortgage closings, Real Matters came out as a public company in May of 2017, starting off with an IPO of about 12 million shares at C$13.00 per.

The stock took a while to catch on, however, dropping as low as C$3 by late 2018. It was then that investors started to take an interest as Real Matters began penetrating the US market, gaining upwards of ten per cent of the market share for Appraisal services along with a toe in the water on Titles over the fiscal 2019 year (ended September 30, 2019).

REAL’s fiscal 2018 saw revenue actually fall by seven per cent but fiscal 2019 saw consolidated revenue grow by almost 15 per cent as the company’s platform started to scale up and earnings went from $5.8 million in fiscal 2018 to $29.0 million for 2019. (All figures in US dollars except where noted otherwise.)

That growth was reflected in the company’s share price which shot up 273 per cent over the 2019 calendar year, making REAL the best-performing tech stock on the TSX that year.

And while last year started well for REAL, the back end was forgettable, with the stock losing half of its value between August and early 2021. Why the drop? That’s a bit of a mystery, as the company’s performance has been equally strong in its fiscal 2020. Consolidated revenues grew by 41 per cent year-over-year to $455.9 million and adjusted EBITDA ballooned 149 per cent to $72.2 million. REAL’s share of the US Appraisals business grew to 11.7 per cent while its Title business now held a 2.4-per-cent market share, both significant improvements.

“The business surpassed the majority of our fiscal 2021 targets, one year ahead of our committed timeline,” said CEO Brian Lang in the fourth quarter and full-year press release on November 20, 2020.

But even with solid top and bottom line results in both its fiscal Q4 in November and the fiscal Q1 2021 in late January, the stock has sold off each time.

National Bank Financial analyst Richard Tse has said the pullback has at least a couple of factors to it, and interestingly enough, he isn’t moved by them at all. Real Matters’ Appraisal business has been slowing in its growth, which has caught the market’s attention, as have prospects for rising interest rates which could put a damper on the housing market.

But Tse thinks investors are missing out on the company’s next growth driver in Title and Close, which delivered a revenue beat in the recent Q1.

Reviewing that first quarter fiscal 2021, Tse wrote in a January 28 report, “In our view, given the focus in recent years on the Company’s Appraisal segment, the moderating volumes in that segment post-COVID spike, combined with potentially rising rates (declining origination volumes) looking ahead, has driven the current hesitancy in REAL. In our view, that line of thinking does not reflect a business that’s expected to growth net revenue by 32 per cent this year with continued growth in Appraisals, and more importantly, a scaling business in Title and Close.”

With his report, Tse maintained his “Outperform” rating for REAL and C$40.00 target price, which at the time of publication represented a projected one-year return of 131.6 per cent.