I'm not big on the “buy now, pay later” industry. However, when an exciting opportunity comes, I won't say no just because of my preconceived notions of this consumer-financing product.
Yesterday, Sezzle (SEZL) jumped 26 spots in Barchart’s Top 100 Stocks to Buy. The Minneapolis-based provider of interest-free installment loans is profitably growing its business. While it doesn’t have the protection of a bigger company to fall back on -- for example, Block (SQ) owns Afterpay——it does have some interesting initiatives to continue growing its business.
It now sits in 69th position with a weighted alpha of 118.03, significantly higher than its 52-week return of 63.7%. It looks ready to move higher up the chart. Here’s why.
Several Initiatives Make It an Appealing Small Cap
Sezzle's market cap is $751 million, which puts it squarely in the small-cap category. I like small-cap stocks, so its moves have caught my attention.
In August, Sezzle entered into a strategic partnership with WebBank. The digital lender will become the company’s exclusive bank for originating loans to Sezzle’s U.S. customers. In addition, WebBank will be the exclusive issuer of all Sezzle subscription products and Sezzle card products.
While initially just in the U.S., Sezzle plans to expand the program into Canada. WebBank has the right to sell any of the loans it originates to other entities and investors.
It also focuses on its small and medium-sized merchants.
On the same day, it announced the WebBank partnership, Sizzle announced that it was teaming up with Liberis to launch Sezzle Capital, which will provide funding to its small and medium-sized merchants in the U.S. looking for funding without giving up equity in their businesses.
“77% of small business owners are concerned about their ability to access capital, according to a survey by Goldman Sachs. This partnership will help thousands of merchants in the United States access the funding they need,” stated Liberis’ Aug. 28 press release.
The reality of Sezzle’s business is that it wins if its merchants and consumers win. Providing both groups with the funding they need, the top and bottom lines should continue to prosper.
It’s Upped Guidance
Sezzle’s stock has gained 68% since it announced its Q2 2024 earnings on August 7. A quick look at some numbers makes it easy to see why.
The most important piece of information from the second quarter was the increased guidance for the remainder of the year. This indicates that management is very happy with the progress Sezzle is making in its quest for market share in U.S. and Canadian BNPL activity.
On the top line, it expects 2024 revenue growth of 37.5% at the midpoint of its revised guidance, which is 12.5 percentage points higher than its Q1 2024 outlook. On the bottom line, it expects a net income of $55.0 million and net income per share of $9.25, up from $7.1 million, or $1.25 a share, in 2023.
In the second quarter, its Underlying Merchant Sales (UMS) were $532.2 million, 38.9% higher than Q2 2023. The revenue generated from UMS jumped 60.2% in the quarter to $56.0 million, or 10.5% of UMS, 100 basis points higher than a record of 9.5% in the first quarter.
If it keeps pushing UMS higher and the percentage it takes from these sales also moves higher, the bottom line will look even better than it already does. Of course, if it continues to increase its subscribers—it added 91,000 in the second quarter, 24.5% higher than in the first quarter, to 462,000—it will continue to grow its profits.
The Bottom Line on Sezzle
The biggest thing Sezzle shareholders should be aware of is its provision for credit losses. For the six months ended June 30, they were $15.2 million, 154.3% higher than in the same period a year ago. As a percentage of total revenue, they were 18.0%. As a percentage of its UMS, they were 1.5%.
“While we expect to see an increase in our provision for credit losses, potentially to mid-2% in the second half of the year, we believe it will be more than offset by enhanced margins, growth, and ultimately higher profitability through more lifetime value creation,” stated CEO Charlie Youakim in Sezzle’s Q2 2024 conference call.
If you’re afraid to invest in regional bank stocks because of the added risk over JPMorgan (JPM) or one of the other big banks, Sezzle is not a stock you should consider.
However, if you are risk-tolerant, the loss provision is manageable in the 2.5% range, probably higher.
Whether we like it or not, BNPL products are here to stay. They enable consumers to better plan their significant purchases. Ultimately, it’s a service like any other.
Sezzle is a buy for aggressive investors.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
