Innovative Products And Calculated Partnerships Propel Revenue And User Growth

Key Takeaways

• Sezzle's marketing strategies and product innovations like Sezzle Anywhere are poised to bolster user acquisition and retention, aiding revenue growth.
  
• By focusing on financial and non-financial KPIs, Sezzle aims to enhance net margins and overall financial health, highlighted by better EBITDA margins and net income forecasts.
  
• Reliance on non-repeatable tax benefits, higher credit loss provisions, and aggressive spending on growth may set unrealistic earnings expectations and impact profitability.

Catalysts

Operates as a technology-enabled payments company primarily in the United States and Canada.

• Sezzle's subscriber growth, particularly driven by successful marketing strategies and product innovations such as Sezzle Anywhere, is expected to keep enhancing user acquisition and retention, positively impacting future revenue growth.
  
• The introduction of high-margin subscription services (Sezzle Premium and Anywhere) aims to increase consumer lifetime value, which, in return, should improve net margins by offering products that resonate with consumer needs and preferences.
  
• Expansion plans, including the bank partnership set to launch in Q4, are forecasted to simplify and unify the product construct nationally, reducing operational complexities and potentially increasing profitability due to reduced restrictions on fees.
  
• Investments in enhancing the consumer experience and launching new products are anticipated to boost active user engagement and transaction frequency, driving both top and bottom-line growth as evidenced by increasing transactions and engagement metrics.
  
• The strategic focus on financial and non-financial KPIs, including a disciplined approach to marketing spend and operational efficiencies, is expected to further optimize net margins and improve overall financial health, demonstrated by improved EBITDA margins and net income guidance adjustments.

Assumptions

• Analysts are assuming Sezzle's revenue will grow by 25.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.8% today to 16.6% in 3 years time.
• Analysts expect earnings to reach $63.7 million (and earnings per share of $9.17) by about September 2027, up from $41.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.9x on those 2027 earnings, down from 20.3x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.7x.
• Analysts expect the number of shares outstanding to decline by 1.39% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.68%, as per the Simply Wall St company report.

Risks

• The reliance on a one-time discrete income tax benefit significantly boosted net income for the quarter, a non-repeatable event that may set unrealistic future earnings expectations impacting net margins in future quarters.
  
• Anticipated increases in the provision for credit losses, potentially reaching mid-2% in the second half of the year, could reduce net income and impact net margins negatively due to higher credit loss expenses.
  
• The aggressive growth strategy, including increased advertising spending for consumer sign-ups and reliance on subscriber growth, runs the risk of rising customer acquisition costs, potentially impacting long-term profitability and reducing net margins.
  
• The introduction of new products and the expansion into bank partnerships carry execution risk and regulatory compliance costs, which could increase operating expenses and impact net margins if these initiatives do not achieve expected success levels.
  
• Market valuation concerns and the emphasis on stock repurchase plans may divert resources from other growth initiatives or operational improvements, potentially impacting revenue growth and earnings if the market does not respond as anticipated.

Valuation

• The analysts have a consensus price target of $156.5 for Sezzle based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $384.6 million, earnings will come to $63.7 million, and it would be trading on a PE ratio of 14.9x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $152.23, the analyst's price target of $156.5 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.