Poshmark stock: the next short squeeze candidate (NASDAQ: POSH)

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Investment thesis

Shares of Poshmark (NASDAQ: POSH) have lost around 85% since their IPO. In our opinion, the business is oversold. POSH has a consistently high gross margin of 84%. The operating margin adjusted for stock-based compensation, R&D and marketing expenses also increased. In addition, Poshmark generates free cash flow. The business trades like a mature business, not a growing business. POSH could become the next short squeeze contender as short-term equity interest exceeds 60%. Reasonable use of accumulated cash (96.9% of total assets) can become a potential driver. We value stocks as a buy.

Company Profile

Poshmark is a social marketplace for new and used styling products headquartered in Redwood City, California. POSH mainly offers clothing, footwear, accessories, beauty, home and pet products in the United States, Canada, Australia and India. According to the third quarter results, the company has 7.3 million active buyers. The business makes money both from sellers (fees collected when sellers sell items) and buyers (fees collected when they buy shipping labels).

On January 19, 2021, the company completed its IPO. Poshmark received net proceeds of $ 292.3 million. Insiders have 45.1% control of the votes through Class B shares.

Not the best, but a solid company

The company has never reached a Wall Street consensus on EPS in the past four quarters. For the most recent reporting period, POSH missed consensus revenue estimates ($ 79.65 million actual versus $ 82.78 million estimated).

POSH Revenue Estimates (Source: SA)

The company only posted net profit twice – in the second and third quarters of 2020. And Poshmark’s revenue growth rate has slowed significantly.

Q4 2020 Q1 2021 Q2 2021 Q3 2021
$ 69.3 million $ 81.0 million $ 81.8 million $ 79.7 million
26.64% 41.76% 22.26% 15.80%

(Source: Created by the author)

However, this light activity should not be underestimated. POSH has excellent potential for creating shareholder value. The company has a consistently high gross margin of 84%. The operating margin adjusted for stock-based compensation, R&D and marketing expenses also fell from 60% to 64.5% in 9M 2021.

9 minutes 2020 9 months 2021
Adjusted operating margin for SBC, R&D, marketing 60% 64.5%

(Source: author’s calculations)

These expense items do not reflect the dynamics of operational efficiency of the company. In a reduction in marketing spending, the growth rate will undoubtedly slow down, but the business will continue to generate revenue as the Gross Value of Merchandise (GMV) per user remains at the same level. Many analysts see the problem that the GMV per user is not going up, but the indicator should not go down. This means that the old cohorts continue to buy from Poshmark.

POSH average gross value of goods per user during the quarter (Source: SA)

In addition, the company is considering European expansion. Potentially, this can support revenue growth as the European second-hand market is quite large. However, due to large marketing expenses, POSH is at risk of missing the EPS consensus again. The market already seems to take this into account, but it does not see the business actually becoming more efficient as a result of a reduction in operating expenses as a percentage of sales.

Today, Poshmark trades like a mature business, not a growing business. According to the EV / Sales multiple, POSH trades at a discount to its peers. Part of the reason is the low profitability so far, but, as we found out above, the growth potential of the indicator is high.

Poshmark, Etsy, eBay, Mercarl and ThredUp: EV to revenue

Short Compression Candidate

About 140% of GameStop’s public float had been sold short before the famous squeeze. However, for a short crunch a significantly shorter interest is sufficient. For example, we saw a similar move in Big 5 Sporting Goods stock in November 2021, although short interest was around 30%.

Price table of the 5 major sporting goods

Now the short interest in Poshmark is 62%. This is a very high number. Any good news and significant positive move in the stock could be a factor in the short contraction. POSH looks like a powder keg with a wick. The prudent use of accumulated cash can also be a potential spark. Poshmark has already repurchased small amounts of shares. The current cash cushion allows the company to invest in development and buy back stocks with confidence. Even after spending all the money, the business will not face a cash shortage as the leverage is low and POSH generates strong free cash flow. According to the latest quarterly report, the cash and cash equivalents balance stands at $ 589 million, or 96.9% of the company’s total assets.

Conclusion

Poshmark isn’t the best company, but it’s pretty solid. POSH has excellent shareholder value potential as the gross margin is high and the adjusted operating margin increases. The market has noticed a decline in revenue growth – Poshmark trades as a mature business, not a growing business. Short interest in stocks is very high and there is the possibility of a short squeeze. We are optimistic about POSH.


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