Poshmark (NASDAQ: POSH) shares have fallen nearly 60% in the past few months, a disappointing turn of events after the company’s IPO in January, when the stock jumped 142% on the day it opened.
The shares are probably so low due to the timing of its market debut, which came a few weeks later. DoorDash, Airbnb, and other booming IPOs have jumped 100% or more in their early trading days (and have since seen a bit of air come out of their stock prices). Management also gave relatively weak forecasts compared to Wall Street estimates in March, which exacerbated the sell-off.
With stocks close to their IPO price, is it time to buy lower Poshmark shares?
Poshmark is a social marketplace for clothing, accessories, and other items. Its platform aims to combine the human connection of traditional shopping experiences with the scale and ease of e-commerce. Founded in 2011, Poshmark currently has 6.5 million active buyers on its platform.
The business serves both sellers and buyers. Sellers list their items (usually in their own closets) in their Poshmark profile for other users to browse and purchase. Beyond the large marketplace, Poshmark provides users with organized selling tools, efficient execution options, and a secure payment platform. Buyers turn to Poshmark for great deals and to follow their favorite sellers.
Management noted that buyers who come to Poshmark often become sellers after using the platform. This further boosts the value proposition of Poshmark, as users come to the service not only to purchase items, but also to earn money themselves.
With each purchase, Poshmark collects a fee based on the dollar amount of the transaction. For sales under $ 15, Poshmark charges a flat commission of $ 2.95. On sales over $ 15, Poshmark keeps 20% of the sale.
In 2020, Poshmark reported revenue of $ 262.1 million, up 28% from 2019. It also generated operating profit of $ 23.4 million last year, which shows that the company can grow its business without years of significant losses by investing in infrastructure and marketing. In fact, sales and marketing spend actually declined last year from $ 132.5 million to $ 92.9 million, which is a great sign of customer retention and engagement.
One attractive aspect of Poshmark’s business model is that it has no inventory. This advantage contributed to the company’s high gross margin of 83.4% in 2020. Taking into account the proceeds from its IPO, the company has a relatively clean balance sheet with over $ 500 million in cash and marketable securities available to invest in growth or strategic acquisitions.
With a market cap of just over $ 3 billion at the time of writing, Poshmark is currently trading at a price-to-sell ratio of 11.6 and a price-to-earnings (P / E) ratio of more. of 180. While these multiples seem expensive, it is important to understand the operational leverage built into Poshmark’s business.
With an operating margin of only 8.9% in 2020 but a gross margin above 80%, this indicates that there is a ton of margin for the company to increase its operating margin as its business grows. If the business can continue to grow its revenue at a double-digit rate while steadily reducing expenses such as marketing and streamlining operations, the high profit multiple will decline rapidly.
Investors should also consider the huge market opportunity that is social commerce. The industry is expected to reach $ 600 billion in global spending over the next seven years. Pinterest and Instagram will likely capture some of that market, but Poshmark has plenty of opportunities to grow its business alongside the competition. Considering all of these factors, now is the time to profit from selling and buying stocks in this social market.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.