Generative AI And Marketing Will Reshape Secondhand Apparel Sector

Key Takeaways

• Investment in generative AI for enhanced shopping experience is expected to increase conversion rates and drive revenue growth.
  
• Competitive advantages in reverse logistics and infrastructure could improve efficiency, lowering costs and increasing net margins.
  
• Economic uncertainty, declining active buyers, execution risks with AI, marketing cost pressures, and reliance on U.S. operations could challenge ThredUp's revenue growth and profitability.

Catalysts

Operates an online resale platform in the United States.

• ThredUp's aggressive customer acquisition and retention strategy, especially the expected growth in active buyers, is likely to drive significant revenue increase as they continue investing in marketing with strong conversion rates and payback periods within a year.
  
• Scaling up processing capacity and sourcing high-quality, premium apparel is likely to enhance gross margins by increasing sales of higher-priced items while meeting growing buyer demand.
  
• Investments in generative AI technology enhancing the shopping experience, such as AI search and social integrations, are expected to drive higher conversion rates and revenue growth as customers find it easier to shop for secondhand items online.
  
• ThredUp's competitive advantages in reverse logistics supply chain and infrastructure developments in processing apparel at scale could result in cost efficiencies and net margin improvements by reducing operational costs and increasing throughput.
  
• Potential impact of tariffs and inflation on new apparel prices could enhance ThredUp’s market position as consumers seek more affordable secondhand options, likely resulting in increased revenue.

ThredUp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ThredUp's revenue will grow by 5.9% annually over the next 3 years.
• Analysts are not forecasting that ThredUp will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate ThredUp's profit margin will increase from -15.4% to the average US Specialty Retail industry of 4.4% in 3 years.
• If ThredUp's profit margin were to converge on the industry average, you could expect earnings to reach $13.6 million (and earnings per share of $0.1) by about April 2028, up from $-40.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.1x on those 2028 earnings, up from -9.5x today. This future PE is greater than the current PE for the US Specialty Retail industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 5.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.7%, as per the Simply Wall St company report.

ThredUp Future Earnings Per Share Growth

Risks

• The ongoing effects of inflation and potential tariffs could create economic uncertainty and impact consumer demand, negatively affecting revenue if shoppers reduce discretionary spending in response to price hikes.
  
• Despite a strong customer acquisition strategy, there is a noted decline in active buyers year-over-year, which might indicate challenges in retaining customers, potentially impacting ThredUp’s recurring revenue and net margins.
  
• The shift in consumer habits and the integration of AI technologies pose execution risks. Failure to effectively deploy these technologies or adapt to changing preferences could hinder revenue growth and profitability.
  
• Increased spending on marketing to gain new buyers while maintaining a sub-1-year payback goal involves risks that may pressure net margins if there are changes in effectiveness or cost of marketing channels.
  
• The focus on U.S. operations following the divestiture of Remix may lead to missed opportunities for growth or diversification, potentially impacting long-term revenue prospects and earnings stability if U.S. market conditions worsen.

Valuation

• The analysts have a consensus price target of $3.0 for ThredUp 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 2028, revenues will be $309.0 million, earnings will come to $13.6 million, and it would be trading on a PE ratio of 37.1x, assuming you use a discount rate of 7.7%.
• Given the current share price of $3.28, the analyst price target of $3.0 is 9.3% lower. 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.