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$POSH - Investing in Poshmark
A bargain basement deal in the growing resale market
Price: $12.83 FD Shares: 85m Market Cap: $1,087m ($453m net cash) EV: $634m 2021 sales: $325m / 2022E sales: $402m
Investment Thesis Summary
Poshmark is the leading online marketplace for apparel resale. As shares of the company have sold off significantly, I believe that there is an opportunity to own a high-quality business with a defensible business model, attractive economics, and a long runway for reinvestment at a significantly depressed multiple. My thesis revolves around a few key points:
I believe that Poshmark is a structural winner in the resale category as: 1) Resale takes share from full-priced apparel, 2) Poshmark takes share vs. online consignment, and 3) Poshmark takes share vs. both vertical and generalist marketplaces. In a softer consumer environment, POSH is well-positioned as consumers are likely to trade down from full-priced apparel to second-hand, and as consumers look to monetize unused closet items for extra income.
I expect to see a re-acceleration in the top-line as the company navigates short-term challenges (Apple privacy / IDFA). The company is also poised to benefit from a post-COVID normalization as occasion-based apparel (i.e. for weddings, proms, graduations, work events, etc.) returns to a more normalized level. Longer-term, growth initiatives such as international expansion (Canada, Australia, India) are likely to add several points to overall growth.
Valuation is extremely compelling, with Poshmark trading at an EV/Sales of 1.6x on 2022 sales and 1.3x on 2023 estimates. With over 40% of the market cap in net cash (and a cash flow positive business), the risk/reward is particularly attractive. I believe that fair value is likely to be in the $30-$40 range while a downside scenario (at a 0.75x sales multiple) is likely to put this at an $8-$9 stock worst case. Moreover, there is likely to be interest from a strategic acquirer if the asset remains misvalued.
Why does this opportunity exist?
Excessive optimism during IPO. Poshmark came to market at $42 in January 2021 and more than doubled during its first day of trading, quickly reaching a high of $105/share.
Growth metrics have decelerated in the last four quarters, partly a function of difficult prior-year comps as well as challenges navigating Apple’s privacy changes.
GMV: (from 4Q20 to 3Q21) 28% / 43% / 25% / 18%
Active buyers: (trailing 12 months) 20% / 18% / 16% / 17%
Revenue: 27% / 42% / 22% / 16%
Given exceedingly poor stock performance since the IPO (the stock is down 90% since ATH), sentiment continues to be extremely negative.
Founded in 2011 and headquartered in Redwood City, California, Poshmark is the leading online marketplace for second-hand apparel. The company operates an asset-light marketplace model in which the company takes a 20% fee per transaction. In the last twelve months, the company generated over $1.7B in gross merchandise value (GMV). The company’s core market is the US and has more recently expanded to Canada, Australia, India, and the UK.
As of the latest quarter, the company has 7.3m buyers (TTM). Each buyer places roughly 6 orders per year, with a $33 average order value. 83% of active users are female, and 80% are Millennials/Generation Z. On the buyer side, there are approximately 5m sellers (TTM). Sellers sell an average of 9 items per year, with an average GMV per active seller at roughly $300.
What is resale? Why is resale attractive?
Resale is the sale of secondhand items, such as apparel, handbags, and shoes, that are selectively sorted, processed, and curated for sale. Resale is one of the fastest-growing categories within retail. In the past few years, shopping for secondhand has reached a new level of popularity as younger generations have destigmatized it. In 2020, for instance, 42% of Gen Z and 42% of Millennials purchased secondhand apparel.
There are two primary advantages to resale. First, it can be significantly cheaper relative to full-priced retail, and second, it is perceived as more environmentally friendly.
The addressable market for resale is large. The demand-side market for resale and thrift (refers to the “unsorted” sale of secondhand) was estimated to be $36B in 2021. Of that, online resale is estimated to be $15B today. Given a strong value proposition as well as a changing cultural attitude towards secondhand, resale is expected to gain share of wallet at the expense of traditional retail, particularly as the category continues to transition online.
While there are many companies that are considered competitors to Poshmark, the reality is that Poshmark is well-positioned to gain share against them. I break down competition into a few categories:
Full-priced apparel – department stores, fast-fashion, traditional brands, could be online or offline. Obviously, there are many. Think of your favorite ones.
Discount retail – stores like TJ Maxx, Burlington, Ross, Nordstrom Rack.
Not-for-profit – thrift shops that rely on donations, such as Goodwill.
For-profit – For-profit consignment (Plato’s Closet, Crossroads, etc.). Sellers will often take a bag full of items and a few might be selected to sell based on what is currently “hot” in the market. Store take-rates are very high, usually in the 50-70% range (50% for store credit). Stores also set the pricing on these items, and there is a strong incentive to price low to guarantee a quick turnover.
Consignment model (managed marketplace):
Luxury online consignment – consists of platforms such as The RealReal which focus on higher-end items like designer purses, watches, jewelry, etc. Average order values are high, usually above $500. Take-rates can run as high as 70% for items below $100 and as low as 30% to 15% for items above $1,000. Prices are also set by the platform and not the seller.
Mass online consignment – consists of platforms such as ThredUp. Items tend to be more value-focused with low AOVs (ThredUp at $18 in AOV). Given the high costs of running operations, take-rates are very high, running at 70-80% of the value of the item sold. Prices are also set by platforms.
Generalist marketplaces (i.e. sell everything) – These include eBay, Mercari, and Facebook Marketplace. eBay and Mercari take-rates start at 10% (although these can go higher depending on services such as promoted listings). FB marketplace does not charge users for selling on the platform (merchants pay 5%), although most sales on FB marketplace typically occur at the local level.
Vertical marketplaces (i.e. focused on apparel resale) – These include marketplaces focused exclusively on apparel resale, such as Poshmark, Depop (acquired by Etsy), Tradesy (acquired by Vestiaire Collective), and others. Poshmark is about 3x the size of Depop and Tradesy in terms of GMV. Poshmark has the highest take-rate at 20%, with Depop at 10%. Tradesy focuses on much higher-end items and take-rates range between 15-18%.
Why is the marketplace model destined to win vs. consignment?
There are a few unique aspects about resale that make it a difficult category to scale. First, each item in resale functions as a completely unique SKU. In addition to different apparel categories, sizes, colors, and so forth, each item also comes with a unique level of wear (new, like new, used, etc.).
This makes resale a very labor-intensive endeavor: items need to be inspected and screened for salability. Luxury items require authentication. Garments often need to be steamed. Then, items need to be photographed. Each item then requires a description and photographs must be uploaded. For online consignment shops, items must also be shipped to a centralized warehouse. The complexity required to do this with millions of items at scale necessitates significant infrastructure and overhead.
What does this mean? For “mass” online consignment shops (i.e. ThredUp), there simply isn’t enough margin at the low ASPs (AOV is <$20) to be able to cover these costs and also provide a reasonable payout for sellers (hence why take-rates are so high). Luxury online consignment shops (i.e. The RealReal) might have more “margin” given higher AOVs, but they also spend more to provide the luxury experience with “white glove” pick-up services and physical retail locations. Higher costs translate into much higher take-rates and lower payouts for sellers. Worse economics for online consignors also make it harder to compete with other models.
Selling through consignment also often comes with additional headaches. For instance, items sent to ThredUp might take up to 8-12 weeks to process. Out of many items sent, only a few might be put up for sale (at prices set by TDUP). Once items sell, TDUP buyers also get two weeks to determine whether they want to return the items or not. So not only is there a very low overall payout on a handful of items, but sellers also must wait for months before they see a single penny of that.
In the online marketplace model, sellers do all the work. While this might be more time-intensive than simply handing over your articles of clothing to a consignor, the payouts in exchange for this are meaningfully higher. Sellers can also set their own pricing. I believe, for this reason, that the marketplace model (i.e. POSH) becomes more attractive to sellers as it allows them to maximize the value of their items.
Why does POSH win vs other vertical marketplaces?
In marketplace businesses, scale begets scale, and Poshmark is the biggest player in apparel resale. As Poshmark has gotten to 3x the size of platforms such as Depop and Tradesy, Poshmark is now operating at a significant advantage relative to its smaller competitors.
The first advantage comes from scale and liquidity. This means that sellers are likely to make sales more quickly and to obtain better prices. For buyers, this means that there will be a much greater depth and breadth of items available for sale.
Secondly, Poshmark has more resources to spend. On the R&D side, Poshmark is better able to continue to add valuable features that take the friction out of buying and selling – for instance, rolling out bulk listing features for sellers, introducing seller analytics, etc. Poshmark can also leverage its size and take-rate to provide better customer support. From my chats with resellers, Poshmark was consistently mentioned as the platform that provides the best protection in cases where something went wrong with a transaction. Ultimately, this makes the service a lot more valuable to both sellers and buyers.
One counterargument might be that sellers often “cross-list” items onto several of these platforms at once. However, if more and more sales are coming from Poshmark, over time the benefit of listing to additional platforms diminishes and the market starts to naturally tip over to Poshmark.
While resale has been an attractive category for new vertically-focused marketplaces, I believe that the competitive intensity will likely fade over time as smaller marketplaces realize that they simply cannot compete effectively. I believe we are starting to see that in the market with ongoing consolidation. For instance, Etsy acquired Depop in June 2021, and Vestiaire Collective made a bid to acquire Tradesy earlier this week.
Why does POSH win vs. generalist marketplaces?
Poshmark was designed to be the app that brings a treasure hunt experience to online apparel. While generalist platforms like eBay and Mercari can be “good enough” for apparel resellers, it is nonetheless difficult to compete with some of Poshmark’s key features that have been designed with apparel resale explicitly in mind.
A core feature of the Poshmark app is the social element. When Poshmark users join the app, they join a community where buyers and sellers can follow each other, style each other, create bundles for each other, and so forth. There are constant “parties” where casual users can share items of their closet with interested parties. The advantage of Poshmark’s social features is twofold: 1) it helps with item discovery (buyers might not necessarily know what they’re looking for ex-ante), and 2) it creates stickiness within the app, where users often spend a significant amount of time (on average, about 30 mins per day). Time spent on Poshmark is time not spent on other marketplaces.
Early on Poshmark partnered with USPS to provide sellers with a discounted flat-rate shipping option (regardless of size, price, or location; up to 5lbs in weight), which was a game-changer. This made it incredibly easy for sellers to simply print out a prepaid shipping label to send out their goods rather than having to figure out exactly what they need to pay based on the type of shipping service, location, and weight. Another key differentiator is that Poshmark has always been transparent about its 20% take-rate and has no incremental fees on top of that (no listing fees, no promoted listings, etc.) so sellers know exactly how much they will end up paying in fees.
While POSH might not have a scale advantage relative to eBay (although it is about 1.5x bigger than Mercari in the US, despite Mercari selling all sorts of items), I believe it can take share as they present a more compelling product that is easier to use and more transparent.
What makes marketplaces good businesses?
Marketplace businesses tend to be some of the most durable franchises. To build a marketplace, one must simultaneously provide liquidity to both sides of the market: buyers need sellers, and sellers need buyers. Given the difficult task of simultaneously building out the two sides of a network, it’s virtually impossible to dislodge a marketplace once it’s well established. Importantly, marketplace businesses tend to exhibit winner-take-most dynamics.
Digging into the financials
As a “pure marketplace,” Poshmark has an attractive financial model.
GMV has grown +40% compounded annually for the last three years, with top-line growing at a similar rate. The platform nature of the business means that gross margins are very high (currently at 83-84%). The bulk of operating expenses come in the form of 1) cost of revenue + operations and support, 2) marketing spend, and 3) fixed costs like G&A and R&D. In the last few quarters, adjusted EBITDA margins have been roughly breakeven, although the company is cash-flow positive since they benefit from negative working capital (they collect cash upfront and take a few days to pay out sellers). There is also some modest non-cash stock-based compensation. CAPEX has also been minimal at a few million per year, or roughly 1% of revenue.
While management has not provided long-term targets, I believe that the company can eventually get to +30% adjusted EBITDA margins (equating to roughly 28-29% EBIT margins). Similar companies such as Etsy and eBay are currently running at 31% and 37% margins, respectively. However, Etsy and eBay have slightly lower take-rates than Poshmark, with eBay at ~12% and Etsy at 17%.
Over time, I expect marketing spend to provide the greatest amount of leverage, as a few key things occur: 1) as revenue from repeat users grows more significant than revenue from new users, 2) international operations start to bear fruit (at least in terms of revenue), and 3) as customer acquisition costs decline over time (or even stay flat). Given POSH’s lead and relative scale compared to other apparel resale platforms, I expect the market to naturally start to tilt in their favor, as often happens when marketplaces achieve a certain level of scale.
Lastly, Poshmark holds a significant amount of cash on its balance sheet, which should be particularly useful if the consumer environment continues to weaken and Poshmark is able to keep investing and/or make strategic acquisitions.
Financial model and key drivers
Above I share the simple model I built. The objective is not to strive for precision, but to get a sense of what the P&L could look like on a longer-term time frame as I play around with a few key variables.
An important caveat with this model is that I am only looking at “active buyers” rather than at both active buyers and sellers (since POSH does not provide updates on the seller side). However, if you fully attribute costs of acquisition to one side of the marketplace then you can get around this problem, although the exact metrics like CAC might not be representative of the real costs of acquisition for all users.
To get to my GMV/revenue estimates, these are the key variables:
Gross buyer additions – I model gross adds at 10% growth per year.
Annual churn – I expect churn to come down slightly from an estimated 15% to 13% as the economics of the two-sided marketplace continue to become more compelling. This means net active buyers grow more quickly than gross adds.
Cost of acquisition (CAC) – I flat line CAC even though a “winning” platform might see CAC decline over time.
GMV per buyer – I model this growing at 5% (Orders +2%, and AOV +3%).
Take rate – I flat line the take-rate at 18.2%.
On the costs side, I make a few assumptions:
Cost of revenue and ops & support are modeled on a per order basis, with the cost per order increasing slightly over time (+2% per year).
Marketing costs are modeled above (based on the flat-lined CAC and gross additions).
Fixed costs (G&A and R&D) I assume will continue to grow but at a slightly slower rate than overall top-line growth.
This gets me to a +30% EBITDA margin in the out years of my model.
At ~$13 per share, Poshmark has a current market cap of $1,087m, net cash of $453m (net of customer deposits), and a current enterprise value of $634m. Given the significant cash on the balance sheet (+40% of the current market cap), I believe that the opportunity at the current price is incredibly asymmetric.
I estimate that Poshmark will generate over $400m in revenue in 2022 and $480m by 2023, which means the company is currently trading an EV/Sales multiple of 1.6x and 1.3x, respectively. I do not believe this is anywhere near the right multiple for this type of business, considering the quality (a pure marketplace), defensibility, and long-term growth opportunity.
A quick and dirty way to value Poshmark is to identify a “fair multiple” for its long-term steady-state earnings power. Profitable internet businesses have traditionally traded at 15x-20x EBITDA. If you assume that Poshmark can generate 30% EBITDA margins over time, you can back into the implied fair revenue multiple (15 x 0.3 = 4.5x and 20 x 0.3 = 6x). Using my 2023 revenue estimate, at a 4.5x revenue multiple, the fair value would be ~$30 a share. At a 6.0x revenue multiple, the fair value would be ~$40 a share.
I have also run a DCF based on my estimates, which suggests a price of ~$40 (I assume a 10% cost of capital and a 15x FCF multiple for the company’s terminal value).
If the company continues to trade at a significant discount, there is also a likelihood that there might be interest from a strategic buyer. Depop, for instance, was acquired in mid-2021 by Etsy for $1.625B while the company generated about $70m in sales (effectively paying over 20x sales). While I think Etsy overpaid, it does suggest how ridiculously low a ~1x sales multiple is for a quality asset such as Poshmark.
Timing: why now?
While I believe Poshmark is attractive from both a quality and valuation perspective, the question becomes, why invest now? The key reason is that I believe growth will begin to reaccelerate over the upcoming quarters.
Poshmark was hit by Apple’s IDFA privacy changes starting at the end of 21Q2. As Poshmark paused spending and redirected marketing dollars to higher-funnel channels it was not surprising to see active buyer growth decelerate. Although by 21Q3, active buyer growth had already picked back up. While it might take a few quarters, I do expect Poshmark to eventually figure out how to best optimize their marketing spend and re-accelerate active buyer growth.
Another important aspect here is that the company stands to benefit from a post-COVID normalization as demand for occasion-based apparel (i.e. for weddings, proms, graduations, work events, etc.) returns to normal.
In addition to Poshmark’s growth initiatives (product innovation, category expansion, etc.) I think another key catalyst could be the release of international user metrics, as international markets are likely growing significantly faster than the core US market and could add several points of growth (once modeled out correctly.)
Refuting the bear cases
Poshmark’s take-rate of 20% is unsustainable
As described previously in the competition section, the reality is that Poshmark’s take-rate is much lower than both offline and online consignment shops. Another key point is that POSH allows you to set your own prices and sellers can decide on the proper trade-off between maximizing price vs. holding an item for longer.
Poshmark also has a more fragmented seller base, with most sellers being “casual sellers” rather than professional sellers (Poshmark and Etsy both have 5m sellers). For instance, Poshmark sellers sell roughly 9 items per year at a GMV of $300 (vs. Etsy at $2.5k per average seller). This is an obvious positive for Poshmark, as sellers have less leverage to extract better terms.
Poshmark’s core social features create too much friction, and this will not allow it to scale sufficiently to become a mainstream resale app.
Poshmark has been successful at introducing social features in the app that have created a very high engagement level (with users spending ~30mins per day). One complaint, however, is that selling on the app can take up too much time, particularly for casual sellers (professional sellers get around this with 3rd party apps that automate tasks like sharing). This generally has to do with sharing items in one’s closet, which is done manually. Recently, there is evidence that Poshmark might be trying to deemphasize sharing and is currently testing its algorithm to prioritize “relevance” over “recently shared” items. I think, over time, Poshmark will try to reduce the excess friction, and this could also prove to be beneficial to growth.
Why has growth slowed relative to competitors such as Mercari and Depop? They must be taking share and/or there must be something wrong with Poshmark’s model.
This can be explained by a few temporary issues: 1) the company turned off marketing in 20Q2 when COVID hit, 2) POSH is dealing with fixable IDFA issues, and 3) certain sale categories within POSH haven’t yet fully returned to normal spending patterns (a lot of thrifting purchases are made for special occasions such as work, weddings, going out, etc.).
Another important factor was that Mercari benefited from being a generalist marketplace (i.e. selling electronics, household goods, etc.) during COVID, which permitted it to grow faster. Depop likely benefited from its core audience (Gen Z) being locked at home and having more discretionary income (stimulus checks, paused rent expenses, education loan deferrals, etc.). POSH, with a wider user demo, likely did not see as much of a benefit relative to Depop.
My understanding of Poshmark’s competitive position is flawed, and Poshmark loses share relative to other online resale platforms (either consignors, generalist marketplaces, or vertical marketplaces).
The consumer environment continues to weaken due to a higher cost of living (inflation, energy prices, etc.), and the decrease in consumption for apparel is greater than a potential trade down effect to secondhand.
Poshmark is unable to effectively navigate Apple’s privacy changes and growth continues to decelerate.
Since the company is controlled by the CEO through a dual-class share structure, there is a possibility for mismanagement (execution, capital allocation, etc.).
Obviously, there are always risks. Please do your own due diligence.