Chit Chat Stocks - Poshmark Revisited (POSH) | Not So Deep Dive

Episode Date: July 12, 2022

Poshmark operates a social marketplace for new and secondhand style products. The company offers various product lines for men, women, kids, and pets. Listen closely as Brett and Ryan go through the history, financials, and future prospects of Poshmark. Enjoy the show! This episode is sponsored by Stream by AlphaSense, the highest quality expert network library. Sign-up here: https://streamrg.co/CCM Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to 7investing with the code "Money" and get $100 off: https://7investing.com/subscribe/aff/4/ Contact us: [e-mail] Timestamps Company Background | (3:43) Industry | (10:54) Management & Ownership | (18:03) Valuation | (23:35) Earnings | (25:51) Balance Sheet | (29:41) Our Analysis | (30:34) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or a recommendation. Now, please enjoy this episode. Welcome in. This is the Tuesday Not-So-Deep-Dive episode on Chitchat Money. And today, we are going to be covering an individual stock in about 40 to 50 minutes. We're going to cover the basics of it,

the history of the business, what they do, financials, and then talk about the potential of the stock and the bull and bear case. And today, we are revisiting Poshmark. We took a look at them, I want to say in early 2021. And now that was right at the tail end of the small cap technology bubble, the ARK Invest bubble, you may want to describe it as that. And Poshmark IPO to right around then, the stock absolutely soared. And now it is down, I believe 90% from all-time highs because it was over a hundred dollars a share at one point. And as I'm looking at my notes here for how I did the valuation, I did a stock price of $10 and 90 cents. So we wanted to revisit it, see why the stock was down so much and whether it's a buy right now. Although we

don't make any recommendations, we're just trying to do some research to help ourselves and help yourself, the listener. All right. We're going to talk about Poshmark, but first we need to talk about our sponsor for this episode, and that is Stream by AlphaSense. This episode is brought to you by Stream by AlphaSense, an expert interview transcript library that has been integral to our research process. If you are a professional investor or have a larger budget, you want to be subscribed to one of these research services, specifically streamed by AlphaSense. They cover TMT, which is technology, media, telecom, consumers, industrials, real estate, and much, much more. They have over 300 expert interviews per week that are transcribed, so you'll never

run out of things to read. And they have an historical library that has over 10,000 transcripts right now. So if you want to go to streamrg.co slash CCM, you can sign up for a 14-day trial using our promo code CCM. I would really recommend trying out the free trial because then you can understand whether this is something that you think will be helpful for your research process. And if you are a professional or someone with a larger budget, this is super, super helpful for getting up to speed on a company and maybe understanding culture, back office stuff, ins and outs of industry dynamics, all that stuff. It is S-T-R-E-A-M-R-G.co slash CCM. Link will be in the show notes. Yes, Ryan.

I'll say this. A lot of the professional investment firms, this is a huge part of their due diligence process, which is calls with insiders, calls with experts on industries. And so this is for the individual that's willing to spend money on their research process. This is an easy way to kind of upgrade their research. And anyone can, and anyone could start for free with a 14 day free trial. So start up with that code we used or the link in the show notes. All right, let's get to Poshmark. Ryan, what do, what does Poshmark do, uh, for the, uh, cause it seems like it's a Posh marketplace. Yeah. Well, the, the audience of people who use Poshmark and the audience of people who listen to fundamental investing podcasts may not overlap. So we might

need some explanations here. That's probably accurate. And I will say that the majority of our listeners are male. There are a decent amount that are female listeners. 10% according to Spotify. Exactly. But it's basically the inverse for Poshmark. I think 83% of their users, according to the S1, were female. So yeah, there's probably not that much of a listener overlap. But Poshmark, for anyone that doesn't know, is an online resale marketplace for clothing, shoes, and accessories. And there's some other things in there as well, but those are the primary categories. And in order to make the platform more discovery-based, instead of just a plain direct search, Poshmark was designed in a social media-like format to encourage. And this

kind of that social media sort of news feed curated to buyers helps encourage interactions between buyers and sellers. And it also helps create a more engaged user base. So by having more engagement between the buyers and sellers, the likelihood of converting transactions is higher. The likelihood of finding new items that you otherwise wouldn't have bought is higher. So for reference in 2019, 87% of items purchased were preceded by a like, comment, or offer on the marketplace. So that's sort of hopefully a stat that paints a picture of the value of social interactions on a platform like this. But there's basically two sides to the platform. There's the seller side and the buyer side. So I'll start with the sellers first. To sell an item, a seller

uploads photos of an item or multiple items, whatever they're selling, and enter some relevant information pertaining to that specific item. So that includes like the category, the quantity, So the number of items, whatever it is, the size, brand, color, original price that they bought it for, stuff like that. And then from there, the seller selects its own listing price. So he or she can also use some like promotional tools that Poshmark provides. So things like Posh Stories, bundles, drop soon, which is like, like, watch out. We're about to drop this new item kind of thing. And then reposh, which is something that you've bought on Poshmark and it's basically relisting,

but they just call it reposh. But then after listing, the seller will likely get some sort of social interaction until a buyer agrees to a purchase. And so once the transaction is actually agreed upon, a shipping label is sent to the seller's email address. The seller has to print the label and ship the item within five days. Sellers get to determine whether the shipping is paid for entirely by the buyer, or if they want to discount it in some way, pay for it themselves. But then at checkout or at the heart of the transaction, Poshmark takes a straight 20% fee for orders above $15. So that's where Poshmark gets its revenue. The sellers that are on the platform are willing to eat that fee because they're aggregating demand for the sellers.

There's not that many other places where you're getting a curated feed or getting items in front of a bunch of buyers. And then from the buyer side, as I mentioned, you get that curated feed of listings relevant to information that you put in while you were signing up, relevant to your recent search or purchase history. And they can use social tools to negotiate prices or save items for later. So you can, like I said earlier, you can offer, you can respond. They have dms now in the platform so you can message uh individually with the buyer but once you receive the actual item you have three days to let poshmark know if the item is damaged or incorrect in some way and if poshmark approves a return so if like the size is wrong or like the fit isn't

right poshmark might not approve it but if they do approve it they'll send a shipping label to the buyer the buyer has like like the seller has five days to return the item back to the seller. And so I think hopefully that paints a picture of how the platform works. Brett has some anecdotal evidence, which we'll get to later on issues, potential issues. Yeah. Yeah. But Poshmark has 7.8 million active buyers, according to the last quarterly report and active buyers just means they've bought something within the last 12 months and they have an estimated 5

million sellers. They don't report that number every time, but it's, I believe they reported it during the S1. And so over time, many of those buyers actually become sellers and a lot of those sellers become buyers. So it's not necessarily like you're on one side or the other. There's transactions going on on both sides. So it is a decent sized marketplace. When you think about 7.8 million active buyers, I think they have 80 million registered users now. So it's large, they've reached scale. I guess you could say, obviously they're still trying to grow, but they're past the hurdle of not having enough supply or listings on their feed.

Is that a good way to kind of describe it? Yeah, I don't think you're missing anything from what I was researching. Okay, and then as far as the history book goes, it's probably worth providing some history on the actual founder or the current CEO, Manish Chandra. So Manish grew up in India. He attended the Indian Institute of Technology,

CONPUR, where he studied computer science. That was his basic background. He moved to the States to get his master's and ended up working on the database side at Intel. And then he worked at a bunch of database startups until 2005 when he started a business called Kaboodle with, I think there was two other founders involved as well. And that was basically the same sort of,

it was meant to be a social shopping experience for home decor. And the company was acquired two years after they founded it for a price that was rumored to be $30 million. Four years after that sale, the team from caboodle that manish founded it uh founded the business with plus one fashion expert named tracy's son founded poshmark and poshmark very much has the exact same not exact because

there's been iterations to the platform but the model is very similar to what it was when they were founded um and since they had had so much success with caboodle they had a much easier time raising money this is something that manish talked about he said they were basically getting funding from day one. It was not that difficult. And they were able to reach a thousand users within the first year of launching the app. And since then they've grown and constantly iterated. They've raised more and more VC money over the years. Brett's going to talk about that and the ownership structure. And they officially went public on January 19th, 2021. So year and five months ago, as of this recording, roughly. And on the first day of trading, the stock jumped from, I want to

say $40 to $102. And now it's back down to right around $10. So it's been a wild ride for shareholders. They do have a lot of cash in the balance sheet. Going to be talking about that, but I'll let you kind of talk about the competition first. Yes. Great timing on the IPO. Looking back on it. Yeah. Let me hit industry and competition. Pretty fun one to look at. We'll hit industry first and then move into competition. So I think there are three different industries Poshmark investors should be interested in. First, secondhand apparel. And the secondhand apparel market was valued at about $96 billion globally in 2021, with about $1.8 billion in 2021 GMV. Poshmark has just under 2% market share. Now, they are not operating in large countries

like China. They only operate in the United States, Canada, Australia, and India. So within their markets, they probably have a larger market share. But the industry as a whole, according to Statista, which, again, always take these with a grain of salt. I kind of just like to look at them and see whether people expect the industry to grow or decline or stay stagnant. So these industry analysts expect it to double by 2026, so say to be over $200 billion for the secondhand apparel market. Now, the other category I like to look at is social commerce, and that was valued at about $500 billion in 2021, according to multiple third-party reports I saw. It's tough to define exactly what social commerce is, but Poshmark is definitely that. And again, it is

expected to grow substantially this decade. It's very, very popular in China. And I'll kind of get into why I want to focus on that when I talk about the competitors. And then the last one is generally the global apparel market. And that is valued at about $1.7 trillion in 2021, and is expected to steadily grow this decade. With that one, it's just kind of a good reference point that the apparel market is absolutely vast. And when someone is competing for everyone's, when Poshmark is competing for people's wallet share, for spending money on shirts, shoes, whatever, there is almost an unlimited quote-unquote TAM, although obviously not one company is ever going to capture the $1.7 trillion. Now, if we move into competition, I've grouped them into five

different categories. There is a ton of competition for Poshmark and for resale apparel in general because of how large the industries are. Now, first one I have is other online marketplaces. These include things like Depop, which is bought by Etsy, Mercari, The Real Real, ThredUp, and eBay. Now, some of these are focused on similar clothing categories. I don't want to get into the exact details of each one. While others are broader marketplaces, the key way that they are trying to differentiate or how Poshmark is trying to differentiate themselves is having the individual sellers, or excuse me, having the social aspect. And then the key way that Poshmark, or excuse me, these competitors are competing with them is having individual sellers of

secondhand items. So eBay has all of that, you know, all sorts of clothing items, but you know, they're still competing with Poshmark because, you know, some, excuse me, I think I said clothing items. They have all sorts of items. Everyone knows how eBay works, but they are still competing with Poshmark because it's secondhand like seller, you know, individual to individual selling. Yeah. And I forgot to mention that this,

one of the big differentiators between this and say, Instagram is the majority of the transactions are peer to peer. So you're getting, you're, you're actually talking to the seller. It's not necessarily like dealing with a brand. Whereas Instagram, if you're purchasing, I don't know if Instagram is the right one because there there's influencers there. I've been more like a Shopify store, right? The Instagram, I would say the majority of transactions on Instagram, you're purchasing from a brand and you're purchasing probably from either an embedded store with Instagram or linking to a Shopify store. All right. Well, I was just trying to make the example easier for people to understand.

Yeah. It's very much peer-to-peer. You're dealing with one, well, sometimes maybe a more popular influencer, but typically one individual where you can easily direct message. All right. And then I'll move to the second one, which is D2C resellers, direct consumer. This is the growing category of many companies, including say Lululemon and Nike. And I'm assuming a lot smaller, other ones have started their own secondhand reselling programs. These have really been announced in the last three years. And I think it's because the resale market has grown so quickly. They do not have like a social element like Poshmark and they're small right now, but given the size of a lot of these companies, specifically someone like Nike,

Lululemon, they could be a long-term competitive threat if they convince their core customers to kind of stick within their own ecosystems. Now, the third category I have is for first party e-commerce. These are whatever brands, retailers you can think of that are selling to people, but not individual peer-to-peer. They're not directly competing with Poshmark from a resale perspective. However, I still think investors should consider these companies because they are competing heavily for wallet share, especially these e-commerce companies for the millennial and Gen Z crowd, which is Poshmark's core audience. Yeah, yeah. I mean, they're certainly competing with WalletShare for a lot of companies. I'd say the most direct comparisons are probably eBay. It sounds like Depop, although I'm not that familiar.

ThredUp, ThredUp. Facebook Marketplace as well. Sure. Yeah. Facebook's pretty scaled. I probably should include that in the online marketplaces. That's very, very similar to this as well. Mercari is pretty popular. And then the fourth category I have is in-person shopping. This is don't really need to spend much time on this. This is traditional stuff everyone knows about, but it is quite large. And again, they are competing for wallet share and mind share among someone who's thinking of buying something. So when a person is considering buying an item for a social event, where are they going to go? There's tons and tons of different places they can go. And Poshmark is trying to convince people to stick with them and say, no, no, you can find your dress or whatever on our resale listed items.

You can find it for cheap. You can do it with someone in a friendly way, make an online friend, blah, blah, blah. And then the last category I have, which is very new and hasn't really grown much in the United States, at least in the way a lot of people expect it, is social commerce. I would include here the big ones would be Instagram and TikTok, potentially Snap, although their execution on that seems poor. Now, there is small competition in Poshmark's markets right now, or excuse me, countries that they operate in. So like the US, there's not much social commerce going on on Instagram and TikTok, the way they would describe it as a direct competitor to Poshmark. Yeah,

people find things to buy on Instagram, but it's more on the traditional route. And it seems like Poshmark is kind of winning, at least currently, and some of the other companies are in these kind of peer-to-peer things, the online marketplaces. But given the size, the capital behind both TikTok and Instagram, I think it's something to track as an investor because if it takes off, both those apps have a billion users. All right. Management and ownership. We hit the history of Manish, but I would just say his salary, and he is the CEO founder right now still, salary was, quote, only $736,000 last year, which looks kind of like minimum wage compared to what a lot of CEOs get paid. So I guess not any egregious pay here, which is good to see. Now their CFO is

Rodrigo Brumana. He joined December 2021. He used to work as the CFO of Amazon's private brands division with some other industry experience. So definitely an outside candidate that you may have expected them to go after, and it's probably a good thing they got him. However, one thing to watch is that he was granted $9.2 million worth of RSUs, which are restricted stock units, similar-ish to stock options as a signing bonus. I don't know how to think about that, but again, He is increasing his ownership stake, his quote unquote skin in the game quickly, even though he's only been there for less than a year. Now, a few other notes in the management and ownership stuff.

I think this one is very, very important. We'll talk about it later. Executive bonuses are based on both GMV growth and adjusted EBITDA. So those are two key metrics they need to hit as a company to get those cash and stock bonuses. Another fun one that I don't think is that important is that Serena Williams, the legendary tennis player is on the board of directors and was apparently a user and kind of a brand ambassador on Poshmark. So don't really think that means much, but kind of cool, I guess.

Are you selling tennis rackets? I do not think so. I think she has her own fashion line as a lot of tennis players do. It's a fashionable sport and she was selling on there, stuff like that. All right. I'm going to move to our stock ownership table for anyone. You can't see the table if you're listening to this, But we're actually going to be doing a new, I don't want to call it a product, something additional stuff to go along with the Not So Deep Dive, which is going to include a newsletter and a research folder for people to access to hopefully, you know, be able to understand the numbers we're going over here, get some great visualization with charts and stuff like that. And one of them is the ownership table. So if we look at who owns their stock, it's a lot different than you might expect. It was kind of strange here.

So they have a lot of funds that own, you know, the stock here. They actually, I think I should start with that. They have two classes of stock, class A, class B. Class B has 10X voting power, pretty standard stuff there. Now, if we go through the first and largest owner, it is the Mayfield Fund, which the independent director, the lead independent director is from there. I forget his name, Naveen Chandra, something like that. Yeah, they were also the first investors. Right, exactly.

So huge venture capital with them. They have a 22.1% ownership of the total shares outstanding right now. However, they have 57.5% voting power. So this venture capital fund, as of the latest proxy statement, has majority voting power. I didn't really know what to think of that. Thought it was quite interesting. If we look at Chandra, he has 8.1% ownership. He owns a lot of class B and about 21.3% voting power. Other funds that own stuff, GGV Capital, Menlo Ventures, Anderson Investments own about 5% to 7.5%. And then if we look at a public investment fund, we have Dorsey Asset Management at about 4.2% ownership. The Vanguard Group through indexes, probably about 3.9%. So yeah, lots of institutional ownership here. And I'm not sure a lot of venture

capital ownership still, which is quite interesting. And I wonder how much of the stock is actually open for trading because we have 22% from Mayfield locked up. Chandra's not selling right now. He's at 8%. Yeah, they got a lot of stock options coming out that could affect this, but it seems like a lot of their- There's been plenty of sellers. Yeah, that is true. The stock's gone down. Obviously, there are some shares available, But a lot of it's locked up, I think, if none of these people are selling. My question to you, what do you think about pretty much venture capital ownership of this business? I don't like it.

I don't think there's any huge negatives, but I just don't like an outside, like someone that's not running this thing. Is it a positive in the sense that typically venture capital firms will release their holdings after they've gone public, they begin to sell them? It doesn't seem to be the case here. Post lockup, they could have easily sold, they're still holding on. Yeah, I mean, I guess in that regard, they're pretty optimistic about the business, but we'll talk about this probably later. given the capital allocation decisions, I don't know. It's hard. It's hard to get. I still don't know what to think about that. It's just weird. I don't know if I've ever seen it. And something for people to watch out for, because the reason we talk about this is if things come down to it,

there's a huge disagreement at the board level. Mayfield Fund determines the company's fate, Which is just interesting because they're not the people running the company, day-to-day operations. This episode is brought to you by La Quinta by Wyndham. Here you are, miles from home and ready to start your vacation. Good thing you're staying at La Quinta by Wyndham. They have free high-speed Wi-Fi to stream all your favorite movies. And in the morning, get fresh waffles with their free bright side breakfast. Or squeeze in a workout at their fitness center.

Either way, you're ready to conquer the day. Tonight, La Quinta. Tomorrow, you triumph. Book your stay at LQ.com. All right, let's move to valuation. Pretty quick one. This is at a stock price of $10.90. Market cap, $851 million.

Enterprise value, given the large cash pile, which Ryan will get into next or later on the balance sheet. Enterprise value is actually $255 million. So huge difference here. huge percentage of their market cap is in cash. If we look at the trailing enterprise value to gross profit, which is enterprise value divided by gross profit, it is 0.9, quite, quite low. I think that's one of the reasons a lot of value investors, it's probably the main reason we got intrigued into looking at this is on a gross profit level, this looks very, very cheap.

Now, if we look at the trailing enterprise value to free cash flow, it is actually 12.3 Now, there's probably some disagreements of what true free cash flow is for this business because a lot of this and probably the majority of this free cash flow comes from working capital and non-cash stock-based compensation. If we look at the potentially dilutive securities outstanding, this could be stock options, RSUs, blah, blah, blah. There were 10.6 million of these outstanding at the end of Q1 versus 78 million shares outstanding, or 13.5% of the current shares outstanding. So quite a large amount. And they

have granted 1.1 million total RSUs through Q1 of 2022. And in May of 2022, they granted an additional 3.56 million RSUs. So simplifying that, lots and lots of dilution. They are using their stock price as currency aggressively. Assuming those options are in the money. Oh, it's RSU. So they're in the money. Oh, they're not like traditional stock options. These new ones. Yeah. They have gone to RSUs this year. If I remember looking at the tables correctly, do not have all the data. They are doing some options, but yeah, a lot of RSUs this year.

It's a bummer. Well, I mean, I, as we've seen, it's a whole nother discussion. If people's stock options don't vest, I mean, a lot of companies just reprice them down. So I don't know if it's really a big difference. All right, Ryan, hit earnings? Yeah. So their first quarter gross merchandise volume, which is their GMV, it's essentially like money being transacted across the platform. And the reason I use that as an important metric is because Poshmark tends to have a very stable take rate. It's typically

20% of orders above $15, but then it's like 295 on orders below $15. Ultimately, their take rate comes out to around 18.2% or revenue as a percentage of GMV. I think it's ebbed and flowed sort of right around there. But the first quarter gross merchandise volume was $493.4 million. That was up 12% year over year and up slightly quarter over quarter. That was a potential problem that people were starting to see was their quarter over quarter growth was slowing and actually decelerating at one point. And so that was a big concern for a lot of people. We'll have a chart on that in the show notes thing. So for any listeners get excited about it, but yeah. Yeah. And then the revenue was 91 million basically. And that was up 13% year

over years. And they have about 83 and a half percent gross margins that excludes their customer support costs. If you include that, that would be about 66% gross margins for the business. But their largest expense is marketing by a long shot. So that accounts for marketing spend as a percentage of revenue was 47%. You think about it, there's no sales essentially with the business. So really- Sales, you mean sales staff? Yeah. Right. So, I mean, the majority of costs are either going to be in improving the product, so research and development, or marketing. And a lot of it isn't even, they don't have that high of an employee count. I believe it was around 750 last time I checked. And a lot of those are

in customer support roles. So the actual marketing employees aren't that high. Most of this money is spent on true advertising, trying to attract users to the platform, which has been basically a problem point for them lately. I'll talk about why that is, but they have historically been EBITDA positive or earnings before interest taxes, depreciation, and amortization for anyone who isn't familiar. In fact, they had 14% adjusted EBITDA margins in 2020 and even higher at various points, various specific quarters during that point. I think it reached a peak of around 35% in Q2 of 2020. So they do have the capacity to be EBITDA positive. They've shown that. And that EBITDA or those earnings figures have historically converted well to cashflow. So in

that 2020 year where they had $36 million in adjusted EBITDA, they had 85 million in free cashflow. A lot of that is because of the working capital advantage that they have. So they take the funds from the buyers. They hold the funds until they get paid out to the sellers so that on the balance sheet, it shows up as funds payable to customers. That's cash that they're holding onto and it affects their cashflow. And that's going to be the largest discrepancy between earnings and cashflow. But nevertheless, they do generate a lot of cash or they have historically. But as I mentioned, EBITDA has turned negative in recent quarters. And a lot of that is because the IDFA changes or Apple's new update with data tracking for customers has really thrown a wrench

in their marketing plans. They used to just pour money into Facebook and Google marketing. They can no longer do that as effectively. The return on ad spend has been poor. So they've been pouring more money into that. And then there's also been advertising costs associated with the launch in a new international market. So India and I think Australia are the two most recent. That's been a big uptick as well. So that increase in cost has resulted in negative 5% adjusted EBITDA margins. They still have positive free cashflow, but as I mentioned, a lot of that is coming from the funds that they're holding that they owe to customers. The balance sheet is pretty clean. It's very easy. So they went public just over a year ago. Like I said, January, 2021, they raised $292.3 million.

Today, they have $596.6 million. So let's round up $600 million in cash. About $150 million of that is owed to customers. So net, you're looking at about $450 million in cash on a, what was it? $850 million market cap. So 52.6% of their market cap is in cash. Pure net cash. Yeah. And that is even conservative because the way I look at it, funds payable to a customer should generally tick up over time in line with basically GMV. And if that kind of advantage, that working capital stuff goes away, well, the business is collapsed anyway, so it doesn't really matter. Yeah. this episode is brought to you by kpmg as a business leader how can you innovate build trust and move forward in a digital era kpmg can help by bringing together the right talent and technologies generating insights that spark opportunities to explore their thinking visit

read.kpmg.us opportunities all right let's move to anecdotal evidence ryan you got anything for us did you download the app i have downloaded the app i've used it before um to buy to search to search to discover not to uh i have not made any purchases but if i were clearing out my closet i think this would be the first destination if i was able to get multiple orders in one or else it's just not practical or not useful for me to go and pay they don't we don't print yeah a big problem is if you don't printers yeah yeah that that too um which may be something they need to tweak in their model but or in their business model um i i think it's a pretty cool platform honestly i know there's a lot of bots a lot of spam but um if i were sort of buying on a

budget i think this is a place i would go yeah it's better than negotiate for lower prices yeah it's better than thredUP. I mean, and you're finding a, like it's built for this clothing experience compared to an eBay or a Craigslist or Mercari where you're kind of searching endlessly through every bit of crap out there. Yeah. And even though there is spam and bots on Poshmark, I trust it a little more than say Craigslist. For sure.

and I like that it's a little more tighter of a focus at eBay where you can, it just feels more curated. It's an easier shopping experience, I should say, at Spire. Yeah. All right. I'll hit mine. I tried out the platform to get some anecdote 11s basically for the show. I just put up some clothes on there that I was never wearing. And as a seller, it was very easy to get going, although I'm really not the core audience. So again, it's hard to tell but and it's pretty easy to get people to sell to i had a bunch of um whatever inbounds if you know what i mean however getting the items to the store like we mentioned is a hassle unless you have a ton of volume and you know it's not a giant hassle but

if you have a tiny transaction printing out the label taking it to the post office it's not doesn't feel worth it if you had to travel a little bit of distance for that yeah for one item probably not worth it yeah and then there are a ton of spammers that follow you like the random stuff it actually made the notifications within the app unusable i am not joking i was getting a notification every minute so i had to delete it uh which is not good plus when you sign up the email spam you so much that i had to block all their accounts again that is not a good look because they're not able to re-advert excuse me re-advertise to me to get me back on i'm basically uh i black mirrored them i turned them off you know what i mean like i

i've ghosted them and they're basically blocked from my digital life now and that's not great and they're still from them now well i i i never bought in the first place i tested it out as a seller but if you were let's say you were a player would you oh i don't know there's just a lot more friction to get me back because i deleted the app turned off oh i don't know if i deleted it but i turn off all notifications on the app because I had to turn off all email notifications. So I'm not going to be, they're going to have to restart me at the top of the advertising funnel. You get what I mean? Cause I just basically forgot about it.

Yeah. They do have a large portion of their registered user base that are not very active. So, yeah. And I'm not, you know, the core audience. So I wouldn't take that as an end all be all for a shitty customer experience, but I don't think it's good for that fringe customer. People do talk about that as a pain point. Yeah. So that I wanted to look,

I looked at the app store reviews and that same thing, people had complaints. So it's not just me. All right. Future growth opportunities. What do you get Ryan? Yeah. So mine is official brand closets.

This is a relatively new product. They launched enterprise oriented tool that allows brands to list on the platform. So we've talked about how peer to peer helps the business scale. Now they're attracting like some actual medium to large sized like clothing brands. Could this be a counter positioning versus say the D to C model that Lululemon, Nike, some other people are trying to do? Maybe, but I don't think this will ever attract the huge ones. It's never going to attract like the Nike to Lululemon because they generate enough organic traffic.

but let's take, I don't know, like maybe a medium-sized jean seller who doesn't get a whole lot of traffic. They announced the companies that were doing this and I was like, I haven't heard any of these. Yeah. So, but now, you know, it's coming from a real brand. There's less risk associated with that transaction because you're not buying it from someone who maybe has worn it out or the fit isn't right. Verified stuff. It's more verified. Right. And so now they've kind of reach the scale to the point where they give these brands something that they give these brands exposure and in turn they give buyers a different assortment of or different option uh or different items to purchase i should say um so i really like this strategy i think it

definitely enhances the platform and then manish chandra said on the latest conference call the brand closets gmv granted this is really small grew two and a half times quarter over quarter um like i said off a small base but it looks like they're seeing a lot of adoption they actually said they had a waiting list for brands to get onto the platform um because apparently there was some problem with their back end but now they're they're they're seeing a lot of brand adoption yeah and that's more on the supply side trying to include the supply mine is on the demand and that is shot by trend so this is a new feature slash product i don't really know what category you put it in for the buyer side of the equation. It personalizes the Poshmark feed for users and

gives them trends to look at. So with so many items on the platform, millions and millions and millions of listings from their 5 million sellers, personalization feels like a great way to improve the user experience. Because personally, when I went on there, just moving around, I found it a bit overwhelming. And if you're not one of those, they hype up how much time people spend on the platform, like 30 minutes a day or something like that. For the people that are looking for the social experience to be a buyer and a seller, they love the resale market. That's fine. But I think some of that time spent on the platform is because there's so much chaos. And if they can make this now, it's a big hurdle to create an algorithm that's legit and can make

you know, the personalization work, but I think that's the right way to move, um, to just get more people buying stuff because if there is a listing rent, like when I, okay, here's, for example, when I went on and searched or, uh, just scroll through a little bit to see if there's anything I was interested in. Well, yeah, I had never been a customer, so I guess they don't really have the data on that, but I found like nothing that interested me at all. If they can get that to things that people are actually interested in similar to how advertisements really work on instagram and how they had such great you know shopping advertisements from um i guess everyone basically knows that now that is kind of what i'm looking at at there does that

make sense or am i talking yeah i think uh just more and more personalization is always uh but not just personalization good personalization because it's got to work all right highlights and low lights ryan what do you have what do you like dislike about this business well one thing that uh we kind of tails really well off our future growth opportunities is that they keep rolling out new products really quickly so they are they have worked pretty hard it seems like on innovating on behalf of both the buyer side and the seller side to enhance the platform the other thing i like is a very asset light business so they don't list they don't manage They don't sell or ship any of the inventory, which I think is compared to traditional retailers has insulated them somewhat from the supply chain problems.

And inventory glots. Yeah. And so, I mean, that's just, I mean, that really is a benefit of the asset-light model. The other thing I'll say, they've reached a decent level of scale now where, I mean, that's always a problem or sort of a big challenge for marketplaces is getting over that hurdle, I think. and that isn't to say it can't reverse but it'll it affords them more optionality even though i hate that word where now brands are coming to them to be on the platform because they've attracted enough people to it low lights for me though they do seem to have that problem with bots and it sounds like that is a problem for a lot of people not just brett and they're still having

problems navigating the idfa changes so this is forcing them obviously to invest more in marketing and explore other channels it's also creating pressure on revenue growth it's i i'm trying to think whether it would be better for them to just pull back on it or are they having to plow money in just to sustain a little bit of revenue growth that kind of that feels like a concern to me what if they can't figure it out it sounds like they're seeing some traction or seeing an improvement on the return on ad spend but it seems like the idfa thing hit them pretty hard and then i'll shop All shopping, I guess I'll just call them retailers, concepts, however you want to do it. They're going to have perpetual marketing spend.

The big question is how much as a percentage of GMB and revenue. Right. And the last thing I'll say, no buyback. So I mentioned that they have 52, 53-ish percent of their market cap in net cash, not even excluding the funds payable to customers. Kinesic Capital, which is an investment firm, feel free to look them up, wrote a letter to the management. imploring them to buy back shares, but still nothing has been announced. To me, this feels like they are essentially saying either we think we're still a growth company and we're going to prove it, or we're going to need the cash because we're seeing

some trends in the business that aren't looking that good. Or I think this is more likely they're incompetent. well you still essentially have the exact same people at the at the head of the company that was there when they were private yeah i don't think they've changed the mentality to be let's let's focus on shareholders which we are potentially public shareholders so that's not always the best sign it might be the venture capital approach that they are still a very venture capital-influenced company, it seems, by looking at the ownership. This comes back to that. Yeah, exactly. I think that is maybe the downside part I was trying to

articulate earlier and had trouble doing. I would love to see them announce a share repurchase program, but they have not. Yeah, I think we all would. All right, I'll hit my highlights. Let's see. The zero inventory thing, you talked about that. I think they're the clear leader in the online resale market for the pure plays right now. So with these online marketplaces, typically you get a winner take most scenario. And they have a unique proposition with the social aspect on the platform. That's pretty difficult to replicate because it takes a lot of backend work and it's still clunky. It still has the bot problem, but that could give them a long-term competitive advantage, I think. But it's still unclear.

And then highlights, again, on the flip side, I don't need to harp on the negative about the buybacks again, but they do have a ton of cash, which gives them capital, or excuse me, optionality from a capital allocation perspective. Now, we've talked about it. It seems like they are just, I don't know, whiffing on using this either to buy back stock or acquire some companies on the cheap, blah, blah, any of that stuff. But again, flipping it to optimistically, they have all this cash that they can use. It was a perfectly timed IPO. So, yeah, that part was perfect, but I, I let's get an activist in here. Um, and then room for an activist. Yeah, I know that's the, well, they do enough RSUs. There'll be room. All right.

Last time I have is they have the multi-year track record of top line growth GMB revenue. So GMB on an annual basis has been very, very steady, which I really like to see. And it leads me to believe that they can continue on this trajectory by gaining market share. And if the industry of resale apparel doubles through 2026, like people think, it seems like if they can execute, that there's a clear path to continue growing GMB at double digit rate. Now, lowlights, let's see, we already talked about capital allocation. We've talked about spammy nature. We talked about the amount of dollars spending on sales and marketing. The last one is I believe there are tons of looming competitive threats, other

marketplaces, DTC resellers, social networks, specifically TikTok and Instagram. TikTok has just announced that they are doing a commerce social feature. Now, these are not threats to Poshmark's business today, but I think they make the platform's durability a bit unpredictable to me because there's a lot of people trying to go after this industry. Yeah. All right. Bull case, Ryan, what's your bull case here? Pretty easy. I think they just turned to profitability. Yeah. I think there's two ways to think about the bull case. So either A, they stopped trying to grow. They stopped plowing money, as much money, I guess, into marketing and in attempts to grow. And that I think would allow them to get to, let's say, 15 to 20% EBITDA margins.

And then they add on buying back shares. That, to me, I mean, they would be trading, if they got to 20% EBITDA margins, so this is the bull case, keep in mind, got to 20% EBITDA margins, based on trailing revenue, they would be trading on enterprise value to EBITDA up six times. That's incredibly cheap for a marketplace that has shown an ability to grow. Granted, I'm saying if they can. So the other way to think about it is they find a way to get back to their previous return on ad spend. It's going to have to be different channels, it sounds like. They're able to reach scale in their international markets and have success the same way they did in the U.S. And the combination of those two allows them to grow GMV by 10% plus for the next five years.

That would hopefully equate to better EBITDA margins as well. Or even if there's, I mean, even if they're at EBITDA, you know, and we say EBITDA here, we usually are not EBITDA fans, but they convert, you know, very well from EBITDA to cashflow, just interchangeable with this company, basically. Given that they don't touch it, don't have any inventory, depreciation is not a very real expense. And yeah, super asset life, blah, blah, blah. Yeah. And even if they're not generating positive EBITDA, they're like breakeven or something like that five years from now, if that GMB growth's there, I mean, I guess never say never, but. it seems impossible that the stock wouldn't be higher. Now I'll go through a simple bull case. I think it's pretty simple. They were either going to see operating leverage through their

market expense, say reducing it from about 50% down to 30% as a percentage of revenue, or they won't. If marketing spending is not unsustainably propping up GMB growth, like we've talked about, then shareholders will do quite well here over the long run with those either scenario that Ryan mentioned, either kind of going for slower growth with profitability or continuing, they get a good ROI on these investments in marketing. No matter how you slice it, I really don't even think we need to go through any modeling here on the show. The stock is that cheap on an EV to gross profit level. Let's go through customer support because that'll scale. So you start at 66.6%. You take out 10% for GNA. They've been, I believe, at 10%

R&D. So then you're at 46%, you chop off 30% for marketing, boom, 15% EBITs and margin. Now- If they can get back to that- If they can get there. It will be great, assuming that the business has not like materially declined in terms of revenue. Yeah. And now let's move to bear case. I think we have less quantitative stuff here, but kind of what concerns you and what can make this business not, I don't know, even stay the same or deteriorate over the next five years?

maybe the platform like sucks i think if there's any sort of it sounds like there's sort of some distaste among customers for the platform that could potentially be a risk especially if another competitor gets it right and they do have it seems like real like competition as a threat yeah and i'll say risk but this to me there there's room for another platform to win here Yeah. And I'll say eBay is much worse. It like, it turned me, it like blocked my account when I signed up. It's really, really bad and it's unusable basically. But I mean, Poshmark isn't good.

Yeah. A lot of the big sellers sell on everything. They're not like Poshmark exclusive. So there is the risk that some other platform comes away and eats, eats away at their customer base or their GMV. I think TikTok is a threat because there's a lot of, you know, quote-unquote influencer sellers blah blah blah right yeah i mean that's they haven't they haven't even launched the product yet though so maybe yeah i think everyone seems to think tiktok is a threat for everything but well they people are promoting poshmark on tiktok like

if you can sell through tiktok through your giant audience there that's so it feels so hypothetical like yeah it is it is very happy a lot of active buyers exactly It is very hypothetically. Also, there's a risk that they just can't seem to get their return on ad spend back on track, which means I'm worried that that is propping up GMV growth. The one thing that I do, and this is maybe as good of a time as any to put it in here, but I have a hunch that this is a platform that does fine through a recession. Oh, yeah, for sure. I mean, it's secondhand stuff. Yeah.

That's one of the huge positives here. Yeah, that to me feels like an interesting setup. There is some downside, but I think the cash buffer provides a pretty significant safety valve, I guess. Yeah. All right. My bear case is I have two main concerns. First, we talked about the marketing spend. Is it propelling them forward or is it just keeping them treading water?

Unclear. Second, and this is one we haven't really talked about, with GMV and adjusted EBITDA as management's compensation targets, I worry they will focus on growing customers and balloon the share count in the process with no focus on free cash flow per share. You can make that argument that they are doing this right now or have been doing that over the last five years. It's a classic worrying about, show me the incentives, I'll show you the outcome. They've grown GMB and adjusted EBITDA recently has taken a dip, but they've historically

generated adjusted EBITDA, but on a free cashflow per share basis, what are we getting here? That is a big bear case for me. All right. More or less interested, Ryan? More. I'm certainly more interested mainly because of the price. I think the platform is fine. I don't think it's a great business.

I think it's a decent business at a really cheap price here. I share the same worries as you. Like, I'm not plowing in to go buy it right now, but I have some concerns that maybe it isn't cheap, that maybe they're sustainably unprofitable from here. I think, well, there's management, how they do it, what they do with their cash. but I mean, that's the huge question. I'm more interested. Yeah. You know, it's so cheap. It's going to stay on my radar. Um, I don't, people talk about how you can't just buy something cause it's cheap. If something gets cheap enough, anything is a buy. Um,

and then the second one, and there's a distinction here. I think the business model is fantastic. No inventory, asset light, super high gross margins, working capital advantage. Um, no moat well the business model isn't you know a business model isn't all that there is for a moat i think the marketplace could develop one if it gets big enough over time however execution i think there's some flaws there and in capital allocation i give them a zero out of ten since the ipo ipo great timing i i don't think that was purposeful though it was just kind of the timing of the ipo i can't really tell how helpful this has been but i do and we didn't talk about this

But the sneaker market is one that I think they could really help their marketplace. And they did make that suede one acquisition, which helps verify the authenticity of sneakers. Hard to know. That was a tiny acquisition, but it's hard to know what impact that could have. And here's another thing that makes me more interested. there are they have i want i have high confidence they are getting reached out to about acquisitions them getting acquired by iac farfetch ebay any of those at sea even to combine with depop um at this price i mean come on like everyone's reaching out all right yeah we're

both more interested i think everyone understands the get pulls and takes here we have stock for next week, which will actually be two weeks from now, because next week we are doing Chipotle with Brad Freeman. But two weeks from now on our show here, we'll be doing, and this is a listener suggestion, Warby Parker, broken IPO, glasses brand. Should be interesting. All right. That's going to do it for this episode. Thank you all for listening. Remember to give us a review on Spotify or Apple Podcasts. Remember, we are not financial advisors. Anything we say on this show is not formal advice or recommendation. We are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Thank you all for listening. We'll see

you next time.