Rising Competition and Regulatory Pressures Will Challenge Long-Term Prospects in the Buy Now Pay Later Sector

Catalysts

About Sezzle

Sezzle is a financial technology company providing buy now, pay later solutions for consumers and merchants, focused on responsible lending and user-friendly payment alternatives.

What are the underlying business or industry changes driving this perspective?

• The mainstream adoption of buy now, pay later services is fueling rapid market expansion. However, the sector’s intense competition and low switching costs make it difficult to sustain high take rates and revenue growth in the long term, creating challenges for future top line growth.
• Recent strategic pivots, including a deemphasis on the lower-margin on-demand offering and aggressive marketing spend for subscription products, may result in diminishing returns as potential customer saturation rises. This could constrain new revenue streams and reduce operating leverage.
• Rising credit losses from expanded underwriting, despite currently stable consumer performance, introduce significant risk if macroeconomic conditions worsen. A deteriorating environment could quickly erode net margins and adjusted earnings.
• Heavy investment in technology enhancements such as AI-driven customer service and new feature rollouts increases fixed costs. The effectiveness and monetization of these initiatives remain largely unproven and could compress profitability if usage plateaus.
• Greater regulatory scrutiny, ongoing litigation, and the uncertainty around acquiring an ILC banking charter introduce persistent legal and compliance costs. These factors could divert resources and weigh on future net income and margin expansion.
• Dependence on flexible capital markets and the need to refinance or expand credit facilities at higher rates could raise financing expenses and limit the ability to self-fund growth, putting pressure on future earnings and cash flows.

Assumptions

This narrative explores a more pessimistic perspective on Sezzle compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Sezzle's revenue will decrease by 7.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Sezzle will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Sezzle's profit margin will increase from 3.2% to the average AU Diversified Financial industry of 17.0% in 3 years.
• If Sezzle's profit margin were to converge on the industry average, you could expect earnings to reach $20.3 million (and earnings per share of $3.17) by about December 2028, up from $4.8 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.1x on those 2028 earnings, down from 19.0x today. This future PE is lower than the current PE for the AU Diversified Financial industry at 17.9x.
• The bearish analysts expect the number of shares outstanding to grow by 3.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The sustained rapid expansion of the buy now, pay later market and continued mainstream adoption, particularly in the United States, could drive higher-than-expected long-term revenue growth for Sezzle. This could increase top-line results.
• Innovative product launches and enhanced consumer engagement, such as the Earn tab, Sezzle Arcade, MoneyIQ, and new AI-powered tools, are showing evidence of increased user transactions and frequency. This can boost both revenue and net margin over the long term.
• Strong recent financial performance, including a year-on-year revenue increase of 67 percent and robust net income and profit margins above 20 percent, demonstrates the company’s ability to scale efficiently. This may result in sustained improvements in both earnings and profitability ratios.
• Sezzle’s management has displayed agility in refining underwriting models and marketing strategies, adjusting product focus to higher lifetime value segments, and leveraging cost discipline. This adaptability could translate into earnings resilience and prevent the anticipated margin compression.
• An improving balance sheet with cash growth, efficient capital management, and the ability to self-fund growth from operations may lower financing risks and further support net income and cash flows. This could counter bearish expectations.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Sezzle is A$19.0, which represents up to two standard deviations below the consensus price target of A$29.82. This valuation is based on what can be assumed as the expectations of Sezzle's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$40.63, and the most bearish reporting a price target of just A$19.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $119.4 million, earnings will come to $20.3 million, and it would be trading on a PE ratio of 5.1x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of A$24.35, the analyst price target of A$19.0 is 28.1% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.