Poshmark stock offers buying opportunity (NASDAQ: POSH)

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Poshmark, Inc. (NASDAQ: POSH) brings in over $ 500 million in cash that can be immediately invested in marketing. If management is successful in increasing the number of customers on their social media and improving engagement, in my opinion the target price could rise to $ 81. Yes, there are some risks associated with potential bad publicity and scalability issues. However, the downside risk does not seem so great.

Social market

Founded in 2011, Poshmark, Inc. offers both a community of buyers and sellers and the flexibility of an e-commerce platform:

Source: Poshmark: Buy and Sell Fashion, Home Decor, Beauty

The difference between POSH’s ecommerce platform and other ecommerce platforms is that sellers have their own styles and shopping experiences. Customers have the opportunity to talk to real people. It seems like a real change in the way items are sold online these days:

Source: Poshmark: Buy and Sell Fashion, Home Decor, Beauty

Among the novelties offered by POSH, I would highlight that users can share, like, follow, comment and even suggest products. In my opinion, clients receive important information from different sources which can help generate engagement and facilitate negotiation. In my opinion, price discovery is made easier thanks to the company’s social features.

With more active users, new product categories, more engagement, and international expansion, my target price is $ 81

In my opinion, the company has enough cash to invest in marketing as well as to grow its user base. New users increase the number of transactions and the network effect becomes stronger. In addition, diversity increases, which enriches the life of the company on social networks. As a result, I would expect a significant increase in the company’s sales growth:

Not only do we focus on growing the community in number, but also in diversity which directly fuels the breadth of products and social interactions offered in our market. Source: 10-k

The company will also increase its revenue when more product categories are launched. In this regard, I think the management is quite smart. Every two to three years, POSH launches a new category using the know-how acquired from the previous categories. If management continues with the same strategy, revenue growth can continue:

Women were our first category, followed by our launch of Men and Kids in 2016. Plus and Petite sizes were added in 2018 and 2019, respectively. In 2019 we added the Home category, in 2020 we added Beauty and Toys categories, and in 2021 we added the Pets category. Source: 10-k

In addition, I will expect a gradual increase in engagement thanks to new elements of discovery, and an increase in the frequency of transactions. Be aware that an increase in the frequency of transactions results in higher levels of engagement:

There is a strong correlation between the overall level of engagement on our platform and the frequency of transactions. Source: 10-k

Finally, I believe that as soon as the market enters additional new geographies outside of the US and Canada, revenues will most likely increase. In 2021, the company announced that it is already present in Australia. However, there are many other countries where the company’s services are not available. I believe POSH will experience significant sales growth when the market enters Europe, Asia and Latin America.

In this scenario, in my opinion, it is fair to expect the company’s revenue to increase at a CAGR of 28.4% from 2021 to 2028. Note that the size of the global Social Commerce market will increase very much. probably at a similar rate:

The global social commerce market size is expected to reach $ 3.369.8 billion by 2028, according to a study by Grand View Research, Inc. It is expected to grow at a CAGR of 28.4% from 2021 to 2028. Source : Social Commerce Market Size & Share Report

My assumptions also include capital expenditure / sales of 1.7% and CFO / sales of 12%. If we take a look at the previous numbers reported by POSH, my numbers don’t come out of the box at all. They are quite conservative:

Source: YCharts

My results include free cash flow of $ 39-353 million. With a WACC of 7.49%, the net present value of the future FCF would amount to $ 867 million. If we assume an equity value of $ 1.4 billion and an exit at 13x FCF, the IRR would be 14%. Finally, the implicit price of the stock would be equal to $ 81:

Source: My figures

Source: My figures

Financials: In 2021, cash on hand doubled as investors gave more money to the company

As of September 30, 2021, POSH was declaring $ 589 million in cash, more than twice the figure reported in 2020. In my opinion, there is significant demand for the company’s equity:

Source: 10-Q

With an asset / liability ratio of 3x, I think the company’s financial position is in good shape. Note that POSH also brings in $ 136 million in funds payable to customers. It means customers are funding the business model of the business, which is fantastic. The company may not have to discuss much with the bankers:

Source: 10-Q

Scalability issues, insufficient staff, and brand destruction could push the price target to $ 15- $ 25

In order to see sales growth, management will need to expand its operations. However, in the near future, the company may encounter technological challenges. The business may have difficulty increasing demand or receiving a large amount of traffic. Additionally, if the business cannot handle a sufficient number of transactions or cannot process the data, the user experience may not be ideal. In all of these cases, I would expect a significant drop in the company’s sales growth.

I would also expect some difficulties when management decides to hire a lot more staff. It’s no secret that companies are struggling to find workers. The company has revealed that it may have difficulty retaining talent. Without new staff, sales growth may fall short of expectations:

These efforts may also involve the hiring of additional staff, and we cannot be sure that we will be able to attract and retain sufficient numbers of qualified staff in the future. Source: 10-k

The company will most likely deal with issues between buyers and sellers. This is completely normal, so I don’t think management should worry much about it. With this, if the company cannot communicate well about the disputed transactions, negative publicity could ruin the image of the brand, and decrease the future FCF:

Sometimes sellers disagree with us when we resolve a dispute in favor of a buyer. The negative publicity and user sentiment generated as a result of these types of complaints could reduce our ability to attract new users, retain current users, or damage our reputation. Source: 10-k

Under the previous assumptions, I designed two DCF models. The first model, more likely than the second, includes 7.5% sales growth and CFO / Sales. These are very pessimistic figures. If we also include a WACC of 10% and an exit multiple of 10x FCF, the target price would be $ 25:

Source: My figures

Source: My figures

With sales growth of -7.5%, WACC of 30%, and exit multiple of 5x FCF, the target price would be $ 15. Interestingly, traders are currently selling stocks for between $ 10 and $ 20, which is close to my worst-case results:

Source: My figures

Source: My figures

Source: YCharts

Competitor risks

The online retail industry is changing rapidly. The changing preferences and tastes of consumers in addition to new mobile devices also make the industry very innovative. The company will have to compete with large, established companies that can offer better terms to buyers. If POSH cannot keep pace with the growth of its competitors, traders can sell their shares:

These competitors include, but are not limited to, Amazon (AMZN), eBay (EBAY), Etsy (ETSY), Facebook (FB), Mercari (OTCPK: MCARY), Shopify (SHOP), TJMaxx, and Walmart (WMT). Many of these competitors offer cheap or free shipping, quick delivery times, favorable return policies, and other features that may be hard to match for sellers, or perhaps a reason buyers choose not to purchase items from our market. Source: 10-k

Conclusion

POSH is accumulating a lot of money from investors which will serve to attract new customers to the platform. If the company keeps launching new product categories, engagement increases and there is more international exposure, my target price is $ 81. If the company finds scalability issues or there is bad publicity, my DCF model lists a target price of $ 15 to $ 25. With the company currently trading between $ 10 and $ 20, I think the company represents a buying opportunity.

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