Poshmark's IPO: a Deep Dive

Poshmark (POSH) has filed its S-1 and is looking to go public on January 13th. But how does this social media-driven resale marketplace compare to others? In this episode of Industry Focus: Consumer Goods, join host Emily Flippen and Motley Fool contributor Asit Sharma as they break down Poshmark's business and discuss if this new IPO is worth a second look.

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This video was recorded on January 12, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, January 12th, and I am your host, Emily Flippen. Today, I am joined by the one and only, Asit Sharma, as we take a look at Poshmark's S-1 filing. It's an upcoming IPO. We're going to be digging into its financials and discussing whether or not we're interested in this recent IPO. Asit, thanks for joining.

Asit Sharma: Thank you for having me, Emily, and I have to ask before we start, does this mean that we have to put on posh British accents for the whole recording today, or we could just use our normal accents since we are talking about Poshmark?

Flippen: If I wasn't going to horribly embarrass myself with my inability to do any sort of accent, I would definitely say we should fake the accent for this episode. But to spare myself and the listeners, maybe not. [laughs]

Sharma: Next time. [laughs]

Flippen: Next time, exactly. I'll work on it and I will get back to you. Poshmark is really interesting. It's an online fashion marketplace. They're looking to go public tomorrow, January 13th, so it's going to be a very quick debut after this coverage. I hope everybody is listening when we release this on the 12th. But Poshmark is a social media-driven second-hand marketplace for clothing and beauty items. It's going to be hard to visualize exactly what this platform looks like if you aren't a user of Poshmark, but you can imagine it as something like a combination of Instagram, Etsy, and eBay, all mashed into one. This is replicating the success that we've seen with other businesses playing in that niche between social media and e-commerce. The end result is, hopefully, what they believe to be a marketplace that has the engagement of even the best social media companies with also a highly integrated shopping experience that can be reminiscent of e-commerce businesses like Pinterest.

Sharma: Just a quick comment here, Emily, I think they've been around since 2011 or 2012. They evolve this way. They didn't spring up last year in an effort to take the best parts of each of these platforms and have this world-beating mashup. But I think it is interesting that they do pull from the various advantages of different marketplace platforms we've seen.

Flippen: I think in my opinion, after reading through this S-1, the thesis for Poshmark really just boils down to whether or not you believe shopping is going to be more social in the future than it is today. It really reminds me of a Chinese company, actually, that I'm invested that's called Pinduoduo. The ticker is PDD, and it's a very risky business, even riskier given today's climate. But it's interesting how the two businesses intersect. Pinduoduo became such a powerhouse in China because it combined social media with discount shopping, giving people the opportunity to group up with buyers and buy things at a really steep discount. Now, that is not what Poshmark is doing, as I've mentioned before, the majority of products sold on the Poshmark platform are resold goods. People going through their closets, finding old clothes that they maybe don't wear anymore that they want to sell. It's different, but the thesis for Pinduoduo, and theoretically Poshmark, I think is the same.

The idea is that you can get a really engaged and sticky audience by finding a lot of the really thrilling experiences of social media with also an integrated purchasing experience. People will sign up for Poshmark's platform and feel the need to come back and visit daily, simply because of the social media aspect. I mentioned this before we started taping, Asit, but I was not a user of Poshmark before coming into this S-1, I am now a user of Poshmark. I set up an account, and going through that process is really interesting, because unlike platforms like Etsy, for which you can just hop on and make a one-off purchase, you have to set up a profile on Poshmark. You have to put in not only your email address, obviously your name, but your age, your sizes, your favorite brands. That's mandatory information before you can even get onto the Poshmark platform, meaning for all the users that Poshmark has, they also have a lot of really valuable information about the sizing and the preferences of their customers. Now, when I get on Poshmark, either app or website, the only clothes I see are clothes that are from brands I like, from sellers that I follow, that are my size. I can't say that I've experienced that anywhere else.

Sharma: These are masterstroke. Actually, Emily, I know in their S-1, they talk a lot about their data-driven algorithmic approach to matching people up with content clothes that they're going to want to buy. I think they do that, it reminds you of Stitch Fix a little bit, but maybe the big brunt of the work is done upfront, taking all this information, they get a lock on you [laughs] from the very first. I was curious, did they ask you to also put in a profile picture? Did they require that step?

Flippen: I think they did, and I think I had to sign up to my Facebook or Google [Alphabet] account. No, now you can find me, [laughs] and I think it automatically took the photo from that. But when I was parsing through their profile pages, not everybody has a photo that's maybe representative of who they are as a customer, that's one thing that I did notice on their platform. But most people I'd say have a profile photo.

Sharma: It's so interesting to me, because I'm not on a lot of social media platforms. I'm on Twitter, so I'm familiar with the concept of followers. Emily, you can accumulate followers on this platform, [laughs] right? I guess, if I get on, then I will follow you. When I see you bought a pair of jeans, I'll say, "Oh, well," because I buy different jeans than you do. [laughs]

Flippen: Yes, it's actually one of the most interesting aspects of this e-commerce experience, and granted, platforms like Pinterest do a similar thing, although admittedly, not as integrated into the e-commerce experience, where you can actually follow sellers that you like. This has led to a lot of sellers coming onto the platform and not necessarily being a one-off shirt sale, but people making handmade goods or purposely reselling goods as a career choice on the platform. The average seller on Poshmark has just under 300 followers, so a pretty sizable amount. I believe they said in their S-1 filing, the largest seller on their platform had more than 2 million followers, to give you an idea about the range of experiences you can have as a seller.

Sharma: Interesting. That's going to be my goal when I get on this. Not necessary by selling, just to grab a lot of followers.

Flippen: When you look at the business, I think one of the numbers that stood out to me the most was actually their engagement scores. They purposely provided an interesting metric that I haven't seen with other resellers. It's essentially trying to encompass both the power of the engagement and the purchasing power of the Poshmark platform. Say that 10 times fast. But essentially, one of the numbers that they provided in 2019 was that 87% of all the items purchased were preceded by a social engagement. That's something like a like, comment, or an offer on their marketplace. The people who are making purchasing decisions are engaging with the sellers before making that purchase. That's not something that we see with other e-commerce platforms. That's much more reminiscent of a social media platform. I like to see that level of engagement. One of the things that I was sad wasn't that explicitly broken out was the retention rates of their users and their salaries. I feel like that 87% number in combination with a really high retention rate, especially when you look at the changes in average order volume over time, could have painted a really compelling story. We didn't quite get there, but that 87% number really shows the level of engagement that people are spending on their platform. Those active users, the people making these purchases spend an average of 27 minutes every single day on the Poshmark platform. It's easy to see how something like a like, a follow, or a comment could end up being a purchasing decision when the majority of their users are spending on average 30 minutes a day on their platform.

Sharma: Yeah. It's such a strong consumer insight, because anyone who's been on a social media platform knows this instinctively. Whether you're one of these people who is just trying to gain a big following, or just interested in following people who you want to learn from or perhaps emulate, it's a draw back to the platform. For those of you who are listening, who are on Twitter, or Facebook, or any of these platforms, there's a draw every day to pick up your mobile phone and just check-in what is new on the platform, maybe you have some new followers. The insights, which you mentioned Pinduoduo had this a while ago to really make that into an experience that leads to a sale, that converts to a sale. To me, it was really persuasive in this business model, simply because I know I check my Twitter a few times a day. I'm not quite as addicted as some people I know, but at least twice a day, I will check in to see if maybe there's a mention or something interesting. Over the long-term, I agree with you Emily, it would've been nice to have seen some of these retention figures, so we could project out over the long term with the true impact could be, but we'll talk a little bit more about retention as we go along.

Flippen: Yeah. Let's get into some of the numbers here for Poshmark, because now that we've covered the business basics, I think the natural question is, ''Well, OK. That's great. How do they make money?'' I think some people can probably make an assumption about how they make their revenue, which is a safe assumption. That's just the e-commerce take rates. The same way that sites like Etsy, other e-commerce sites take a percentage of any sales operated on their platform, that's the same thing that Poshmark does. Despite the emphasis that they have on social media, ultimately, they want all of their engagements to lead to some sale because that's how they make their revenue. Their take rates, which is their transaction fee, it's 20% of the final price of the sale if the sale is over $15. If the sale's under $15, it's a flat rate of $2.95. That's really high. I'm not sure if that struck us as high as it struck me Asit, but we're talking about, so I'm making a career, I mean, 20% is pretty hefty.

Sharma: It's a steep take rate, and it's one of the higher take rates you'll see across e-commerce platforms. The idea that if the sale is under $15, well, let's just say you have a sale at $14.99, $3 or almost $3, that's approaching 30%, then you can see if you're selling something for $3 or $5. You can do the math. That's a really high take rate the company is doing. Over the grand course of the year, I think when you look at total gross merchandise value, most of these sales are going to have to be over $15, $20, and they're probably higher price points simply because this is trending a little bit toward the fashionista side of the spectrum. We can expect to see more premium price points. A seller can make money, but again, it's resale. This is merchandise that you may have paid. I will just pick a round number, maybe $100 for a nice blouse and then you're trying to monetize that as a seller, while making it enticing enough that you'll be able to convert the sales. There is a magic formula in there that I think they override that with a lot of data, that if we avoid some critical parts of a marketplace business, if we don't hold inventory, it can work for us and the seller. It can work for Poshmark and the seller. That was one of the things that you had noted, I think, Emily, going through here that the company has really nice margins, which will get to. That's part of the reason because it's going from buyer to seller. You're selling me an item, they never have to mess with the inventory. But I was surprised. I was surprised that obviously the growth in gross merchandise volume and the growth in users supports that, people are willing to give over that 20%, because most of the items again that they are selling are going to be a little bit more of a premium price point.

Flippen: That's a really nice segue into one of the other really important metrics that Poshmark provides in their S-1. It also answers a lot of the questions that we're getting as we tape here this podcast live in front of our Motley Fool Live audience. A lot of people are asking about how this company compares to another e-commerce retailer, called the RealReal. This metric will answer that question. It's the average order value. You mentioned that part of the reason why they're take rate is so high is that they take a percentage of their average order. Now, depending on how large the average order is obviously dictates how large of a take rates that they have at that 20%. A part of the reason why they have to keep it high is that their average order value is actually pretty low for an e-commerce retailer. It's $33 in 2019, an average order value. The average person going on to Poshmark, the average buyer is spending around $33 an order. That's considerably lower than competitors, especially businesses like the RealReal or Farfetch, which are in the hundreds of dollars, mostly focused on the resale of designer or luxury brands. The average brand that you'll find on Poshmark is something like Forever 21 or H&M. These are the brands that I noted when I signed up that I liked. They'll send you emails where you get recommendations. But the point is, I'm not paying full price or even a high price for a resold good from a lower-end retailer. Now, you could argue that there's power in their brands. It enables the average person to become a seller on Poshmark. The average person who maybe isn't into brands, doesn't spend a lot of money on luxury goods, who just looks to clean out their closet. But I could also see an argument in the opposite direction, which is that they have to charge a really high and expensive rate because the goods that are sold on their platform are relatively cheap, and that could also lead to some poor experiences for members. I think that's one thing that differentiates Poshmark from other resellers, that low average order value. I didn't see, I'm not sure if you saw, Asit, but I didn't see any year-over-year numbers for how that's trended over time. I can't say how that $33 has changed from 2019 to 2020 or previously.

Sharma: I didn't see it. In fact, I missed that price point in the S-1, which is surprising to me, because that clearly means that this is a volume-dependent platform, which they've got the volume, so it's working for them, but I'm surprised at that price point that it's only $33. Instantly says something very nice about the platform, but introduces some risk, because we know that this type of platform business, the trend in creating marketplace platforms, is combining with another really powerful trend, which is just the resale market in general. I feel like there's going to be much competition in this space at all levels of merchandise. So, really expensive stuff, we've got the higher-end retailers, retail platforms, I think Farfetch is maybe an example of that, and then you've got some that really are just looking to draw people who want to get rid of stuff. I think thredUP is maybe an example of that. Maybe this is somewhere in-between in the lower third, but all-in-all, we'll get to numbers in a bit, actual financials, that I think it's something positive that they've been able to attract this user base and grow it at that level. Surprising.

Flippen: Before we move on to digging into more of their financial metrics here, a couple of other important numbers that we haven't yet mentioned that will give investors and listeners an idea about the scale or the size of Poshmarks' business, that's their active users, and that growth, as well as the active sellers. Poshmark has just under 32 million active users as of September 30th. Around 20% of those, around six million, are active buyers. Right now, I would be considered an active user of Poshmark. I have signed up, I have created a profile, I have browsed some sellers, I've engaged a little bit with some social media aspects of the platform, but I have not yet placed an order. I'm part of that 32 million active users. Anybody who has placed an order would be considered an active buyer. Then there's also active sellers. As of that September 30th date, Poshmark has around 4.5 million active sellers. Now those numbers may sound big. 32 million users, 6 million buyers, 5 million sellers. But let's throw out Pinterest. I keep using Pinterest as an example, but it is a good example of what Poshmark maybe could become in the future. It's really only a fraction of Pinterest users. Pinterest has over 440 million users, to give you an idea about scale here. Poshmark, the reason why many of us probably haven't heard of it, is because it is still very small, which will lead us into some of the talk over revenue and finances here.

Sharma: Sure. Small is good in some ways, because that's your potential to grab market share from the bigger players. Emily, I wanted to mention one more statistic. You mentioned the gross merchandise volume, I think the past 12 months was around $375 million. They've cumulatively done about $4 billion of total gross merchandise volume. I bring that up only to say that many platforms you will look at are doing in the billions of gross merchandise volume in a year. That maybe speaks a little bit to the potential that in all these years, it's only accumulated $4 billion. Again, that also is to mean yes, it's a big number, but relative to the size that some marketplace businesses grow, I think that maybe speaks to potential, but again, also have to leave in that with what I think is going to be intensifying competition, or are they really going to get to an appreciable size?

Flippen: When you say $4 billion in cumulative merchandise value, just over the past 12 months, if you look over the previous 12 months, which were actually really good for Poshmark, despite the pandemic, which we'll get to that. If you look over the past 12 months, they did under $400 million in gross merchandise value. To your point, that's not a ton. This is a very small platform. Another thing that I think is interesting, maybe an opportunity, maybe a risk, is looking at the users. As you may expect, 83% of active users are female, and 80% are millennials, so they have a clear target demographic here. Again, I apologize, but I can't help but compare it to Pinterest, and Pinterest's S-1 when they went public last year, they noted, in contrast to their numbers, that 80% of all women in the United States aged 18 to 64 or children were Pinterest users, and 43% of all Internet users in the U.S. were Pinterest users. That's amazing rates of penetration in the United States, and Pinterest is still maybe perceived as a skeptical play on social media e-commerce. I tend to like it, but there are a lot of investors who don't feel the same. All of that is to say, Poshmark is going after the same audience as Pinterest, but has been a lot less successful in actually penetrating that audience over the same time frame that Pinterest has.

Sharma: Pinterest has a way of proving people wrong, Emily. I avoided buying it for so many reasons that are just embedded in what you just said [laughs], but it is a very strong business. I still think, aren't those numbers fake from that S-1? 43% of everyone who is using the internet in the United States is a Pinterest user. That's phenomenal.

Flippen: Isn't that crazy?

Sharma: It's crazy. I mean, one day I'm going to have to do some research and see if I can challenge that, but I'll probably prove myself wrong. That's Pinterest for you, another really interesting company worthy of investors attention.

Flippen: When you look at the engagement that they're getting from their admittedly smaller audience from Pinterest, they can lead you to some of the conclusions you can draw from their financial performance. One of the big levers that Poshmark is looking to pull to continue to grow revenue with their smaller audience pools, obviously pulling in new customers, but also just deepening the engagement with their sellers and their buyers. They've really focused on having their buyers also be sellers on the platform, and ensuring that their sellers are also buying on the platform. If you look at some of the numbers that they provided in their S-1, some really interesting statistics here, they provided the cumulative percentage of buyers that are also sellers from the first year of the buyers purchased to year five, and that number rises from 41%. 41% of buyers are sellers in their first year, to 52% by year five, and then you can look at the inverse. That's the cumulative percent of sellers that are going to be buyers on the platform. That rises from 31% of the sellers first-year to 44% of sellers who are also buyers by year five. Those numbers I think are moving in the right direction, but also offer the opportunity for improvement in the future. They are high enough to show a trend, but also low enough to still show growth.

Sharma: Sure, and the more they can push these numbers, the better as they scale up. That just makes all of their marketing efforts, all of their selling efforts in terms of selling tools to buyers and sellers, just more efficient if it's the same person that's receiving the messages, rather than adding new people to the pool, which of course they want to do. You have to keep growing your platform. This has a way of showing up in the profit and loss statement over time, in the form of just increased operating margins, so it is a positive trend. Again, I just go back to the lack of comparable metrics. This is an instance that we see a few years' worth of metrics and a trend. I think, Emily, maybe it's a power of suggesting, maybe because when we were prepping for this episode, you were complaining about some metrics not having year over year comparisons, and I think I caught into that mode. Why don't we have better retention metrics from this company? They do have a couple of graphs that indicate that their retention of customers on a dollar basis is growing, but they don't give any kind of indication of what customer churn is like. With people leaving the platform, how sticky it really is.

Flippen: One metric that they provide that I love to see in S-1, are their cohort performances. This is similar to what we saw with Chewy's S-1, that Poshmark breaks down the people they brought in from their different cohorts, spanning back from 2012 all the way to 2019, and tracking how much they spend over time. To your point, unlike Chewy, Poshmark does not tell me how many of those users they actually retained, which worries me a little bit because it makes me wonder about what their customer acquisition costs end up being long-term. You really only make good on your customer acquisition costs if you're able to retain those customers. It seems like, from their gross merchandise value by cohort that they provided, that they are increasing. The customers that they retain year over year, so the average person who came in, and I think it was 2012 to 2015, who is spending an average of $170 in gross merchandise value on their platform a year. That's risen to $231 in 2019, so that number is expanding, and it's expanding for all of the cohorts that they provided over time. Unless I know how much money you spent to acquire that customer, and unless I know what your attention was like for all of those customers, it really makes that gross merchandise value by cohort metric kind of useless. I don't mean to nitpick over having that missing retention number, but I'm shocked for a company that does depend so highly on engagement and retention, that they didn't provide more detailed analysis there.

Sharma: Yeah, and they've proceeded to market by a string of companies that did provide these kinds of metrics, and not to hold them to any kind of high standard, but just a standard of comparability, because they're going to enter a space where there's some really interesting choices. We've mentioned Farfetch on the high end, I think RealReal is in the Revolve Group, which you and I have talked about. All these are platforms where you can get those metrics, and if you're making an investing decision, you want to compare like to like. Perhaps they'll provide this say in conference calls in the future after they report their first quarterly earnings. That's something that we can look for.

Flippen: While we finish off here, we'll get into the risks of this business. Obviously, there's some risks that we haven't quite gotten to yet. One of the good things that came out of this S-1 is their financial performance. This is a business that has gross margins in the upper 80%'s, so 83% over the previous 12 months. Again, since I've been comparing to Pinterest, I realize this is not apples to apples. Obviously, Pinterest is less focused on e-commerce, than Poshmark is right now. Since I've been comparing it to Pinterest to this point, it is worth noting that that is better than Pinterest's 75% gross margins. So, this is a very high margin platform as you alluded to. Also they do not hold the inventory, which allows them to have those really high margins. They've also been spending less on sales and marketing overtime, that's trended downwards. It was 68% over the previous 12 months, SG&A margin. They're also growing revenue, admittedly not as fast as their competitors. Their revenue over the previous 12 months was up 20%. Not bad, but also not anything to write home about, and nothing that I'd pay a Pinterest level premium for.

Sharma: True. It is nice to see operating margins. It's nice to see them turn a profit. One of the things that they've got to scale as they grow revenue is to scale that fixed cost base. Part of that is the spends that they lay out for selling and marketing. That is showing progress. But at the same time, one thing you and I discussed earlier is looking at what's going to happen in a post COVID world. They received a boost over the past couple of quarters after a really rocky first quarter. Second and third quarters, they really saw some boost out of that marketing spend. In other words, they got more sales per marketing dollar than they were getting before on a year-over-year basis, and on a sequential basis, up until the third quarter where they fell off just a bit. That's a sign that some of this operating leverage is going to stick around, but how much? That's why it's interesting to see exactly where they'll land in the next couple of quarters. I do like, though, that they are already turning a profit. COVID booster, no. It's good to see them hit that, because it shows that, in some case, or in some business case scenario, as they grow sales, even at a slower clip, 20%, 30%, 15%, there is an equation where they can work the sales and marketing spend, which is their biggest line item outside of their cost of sales, to consistently turn out hopefully positive operating cash flow along with some GAAP profits. We should assign them a plus for that for sure, but the jury is still out. We're going to need some more quarters to see exactly what this business model looks like after everyone is vaccinated and looking at where else they can spend their consumer dollars [laughs].

Flippen: If I can be a little bit of a negative Nancy here for that plus, I have a little bit of a minus to go alongside it. Some really good points there about their financial performance. I do think that a lot of this is probably a result of COVID. As you mentioned, management was pretty upfront that their marketing dollars went way further these past couple of quarters than they did previously. This was not a business that was profitable pre-pandemic. They shot up to sudden profitability on a net profit basis. In the second quarter of 2020, they made $21 million, and then that got cut in half to just over $10 million by the third quarter of 2020. I would not be surprised to see this company go back into the negatives here in terms of net loss, simply because of the marketing spend. Part of the reason why I'm a little bit worried about that marketing spend is because, when you look at revenue growth, that 20%, you can compare it to the growth in active users. They had 42% growth in active users over the same time period that they had that 20% revenue growth.

Now, that could be fine if those active users are going to retain and spend more money in the future. But I don't have any of those retention numbers. How am I, as an investor, supposed to make any assumptions about how sticky that 42% growth in active users ends up being in terms of actual revenue for this company, when they don't provide retention numbers and they're growing revenue at less than half the rate that they are acquiring customers? I apologize. I'm coming across awfully negative here. I don't mean to sour anybody's opinion, but it is just to say that, coming out of this S-1, I felt like I still didn't have a complete picture of what to expect in terms of business performance over the next, at least year, simply because I was missing those critical ratios.

Sharma: It's interesting, we were chatting just before this podcast on our Motley Fool Live, because we're taping live on Motley Fool Live with Tim Beyers, about Stitch Fix. Now, Stitch Fix is a company that's [laughs] moved toward level two of business. What is that? It's moving from only looking at your customer acquisition costs to figuring out what's the lifetime value of this customer. Let's focus on increasing that lifetime value. If you've got a lot of customer churn, then you're still at step one in this business. If you read the tea leaves, Poshmark doesn't have the jet engines yet to scale reliably where you can conclusively say that they're growing because they are adding new members to the platform, customers are spending more, they're sticking around. Now we can extrapolate out of this, a customer will be worth X dollars in five years and 10 years. Why is that? It may be because there is some churn here that they are very good at attracting new users. That pushes up that total gross merchandise volume, but there's something going on underneath the hood that's still not visible to investors, and where we'll see it, Emily, is exactly where you're pointing, one, two, three, four quarters out. You can't hideit, it's going to show up [laughs] in the numbers, in lower profits. Maybe in one quarter you could see a slide back into a loss. That's not unusual for these types of platforms. Their earnings can be variable.

Flippen: Before we wrap up here with our risks, I want to touch on management really briefly. I'm not sure if you did very much digging into this management team, Asit. I tried a little bit, and I really wasn't able to make much headway. What I did find is that this is a business that's going to be controlled through a dual class share structure and run by four co-founders. There's a CEO, Maneesh Chandra, and I apologize, I'm going to butcher everybody's name.

Sharma: That was perfect.

Flippen: Thank you. [laughs] Well, now it's about to get bad. Co-founder and CTO, Gautam Golwala, Co-Founder and VP of Engineering, Chetan Pungaliya, and then Co-Founder and VP of Merchandising, Tracy Sun. These four co-founders don't have a very robust history behind them. What they did prior to founding and, obviously, running Poshmark is actually founding and running a company called Caboodle. Caboodle was a local community networking platform. It still seems to be up and running today. It's interesting. I feel like they are great at naming things; Caboodle. Poshmark, before it became Poshmark, was known as GoshPosh. So, these are people that are clearly skilled in naming businesses. But I can't testify much to their success in running a company other than the fact that they have been with the business, running it, obviously founding it for the past decade, which I think says a lot about the team's long-term focus. More importantly, they're going to be the controllers of the majority of the voting rights of this company once Poshmark is public. I look forward to getting more information about them in the future, but I didn't see anything that struck me as an immediate red flag.

Sharma: Yeah, me neither. The fact that they have control of the voting stock also implies that they have among them a sizable amount of stock and interest in the company. You can just look at that as an incentive to grow the company. It's something you want to see, and four co-founders is a nice number of people to have. You see them fall off after a while. The positions they are holding, pretty nice. One of the co-founders, Gautam Golwala, is now the CTO. Chetan Pungaliya, I think I'm mangling these too [laughs], Emily, is currently VP of Engineering. Tracy Sun, VP of Merchandising. They are over the really broad parts of the business, so they can be the architects of how it grows. I like that, we'll see them that positive.

Flippen: As we wrap up here, I want to finish off with a question about if you are interested in this company. If not, what would make you more interested? But before I do that, I want to talk about some of the risks. There are always risks in companies. It's impossible for us to do an S-1 dive and not talk about the genuine risks when you invest in any sort of equity. There are entire sections laid out in SEC filings just to the risks. But if you had to nail down maybe just one or two things that you consider key risks for the business, what would they be?

Sharma: The first would be one that you've already mentioned, which is that after this period of COVID-19 passes, if there is indeed some churn underneath the hood, how will this company be able to keep those sales above the level where the marketing dollars aren't trying so hard to grab new customers. That's their biggest challenge after we get through -- we were saying in 2020, "After we get through 2020," but let's see after we get through the first half of 2021. Hopefully, things look better in the overall economy, but I also think for me it's a little bit of the intensifying competition in this space. Marketplace businesses had a low Emily, and for a while, we just saw eBay, MercadoLibre, and then the payment side companies like PayPal. It seemed like there was a long time where those were growing, they had some growing pains. As technology has improved, as Amazon Web Services and Microsoft Azure have made it easier and easier with a host of tools for people to start these businesses with very little capital, there is a lot of intensifying competition in the space of platform businesses. There are many new entrants.

This IPO is just one example, I'll talk about that in just a bit. But to me it's how do you keep your advantage without any real competitive moat? The one thing I did like is the merging of social with the buying experience, but that's not something that's unassailable. I think that wouldn't be too hard for other companies to replicate. For me, those are really the biggest risks. I'm worried about not an infinite amount of capital chasing other new ideas in this space as they come along and go public. What about you? What do you see as the biggest things you worry about?

Flippen: In addition to what you noted, which I think are really great legitimate risks, I think the one thing we haven't mentioned that I would consider is competition. There is a fair amount of competition in online resale that shouldn't surprise people. We've talked about a lot of these businesses in the past, and I will happily admit that I don't think any of these competitors have integrated the social experience in such a compelling and exciting way the way that Poshmark has. I think they've done an amazing job of operating in that integration between social networking and e-commerce. Where my concern is, is the fee structure. I have to wonder if that $33 is a result of the high fees that they charge on the platform and ask myself, if I was going to sell my clothes, where would I choose to do it? I can see the appeal of having a captive audience that is really engaged and really likely to buy over Poshmark, but at the same time, if I'm selling something, let's say I'm selling a shirt. You mentioned a $100 shirt, I think it is a good example. If I'm selling a $100 shirt, $20 of that is going to go to Poshmark. That really starts to cut into the amount of money that I would make as a seller on the platform. I have to wonder a little bit if they would ever be able to increase that average order value. It concerns me that they didn't give me the year-over-year change or any long-term change in that average order value.

That makes me wonder if it hasn't really moved historically, and if we can't expect for it to move into the future, simply because of their high fee structure. That's my minor concern; in addition and that's backed up by the fact that I've seen sellers since browsing on the marketplace, many products listed around the $3 mark and with the $2.95 fee that Poshmark charges, I think a large number of these sellers are probably A, trying to get social media traction by selling a large quantity of products, potentially a loss for themselves, or a neutral for themselves when we consider the fee, for the purpose of building up followers. I think that sort of churn can also keep the average order value relatively low. Granted, their take rates again, their take rates are high. The $2.95 fee on a $3 order is a pretty strong value-add for Poshmark, but is that sustainable over the long term? I'm not so sure.

Sharma: I usually wait a quarter or two for an IPO to seed, to just get its sea legs. There is a phenomenon, more I think in the past and that I've seen recently in the hot IPO market, but there's definitely been a trend of window dressing in the IPO market. That means that companies are trying to put their best foot forward and dress up their financials and results, and when they go public, either they're going to perform or are they going to revert back to their normal state? I always think it's easy actually to wait a couple of quarters. I very rarely suffer from FOMO, fear of missing out. In this case, I think it's really advised to do that, just simply because of the point we've been talking about that this company has a period where it's going to need to pull itself away from the ramped up COVID purchasing and then we'll get a truer sense of what the financials look like. I'll be waiting probably for that reason alone. I'm definitely going to follow it, I do like the capital-light model. As some listeners will know, I am a fan of Revolve, we talked about it on Industry Focus. That's another profitable company that I think has some real potential, but they've got inventory, as I mentioned earlier, this company doesn't. It has the potential to have, I think, some steady growing earnings, if these other questions are resolved.

I love the intersection of these two big trends, I'm a fan of marketplace businesses. I like the growing trend of apparel resale, but to your point, Emily, there's thredUP, there's Tradesy, there's Vinted, Mecari, The RealReal. Now, all these aren't publicly traded companies. Even Levi's has opened up a resale platform for its jeans. All of these companies I've just mentioned are hitting different niches in the space. I don't mean to imply that they are all coming to Poshmark. Each has a different take on the price points and the merchandise that they have going over their platform, but you're right. This is not a home-run idea. It's going to be one that's going to prove itself over time, if it does, by the strength of the social business model, and hopefully it will be able to keep a step ahead of other platforms that want to adopt that.

Thirdly, I'm really curious to see how the market is going to value Poshmark in relation to other fashion sites that are publicly traded, and marketplace businesses in general. We've seen a lot of marketplace businesses get a premium in the marketplace. I'm a shareholder of Etsy, I think you are too, and they've had a really great run, but these types of businesses, clothing platforms, they've got a history of actually stumbling fresh out of the gate, going down for several quarters versus the broader market.

Farfetch, which has had a really great last 12 months, had this experience. The RealReal had this experience as well, and so did Revolve Group. I'm just curious, there is a lot of froth in the market now, and people are chasing what they perceive as hot IPOs. I'm not so sure that this is one that the capital is going to pick up and run with, so we will have to watch there. Then, I guess finally, I would say for me, this trend of marketplace businesses, just steadily growing GMV, the better ones, which is such a reliable way to increase your returns on your invested capital. If you've got this really big built-in vehicle, that's all the money being transacted over your platform and it's growing at a steady clip every year, all you've got to do is take your slice, the take rate. That's very attractive to me, and that's why this company will stay on my watchlist. It's not one that, after reading through the S-1, and especially after hearing your insights today, I can't wait to go out and buy, but I don't want to knock it too much. I have been proven wrong. I was very skeptical about Farfetch and that has proven me wrong, so I'm going to follow it. Now, Emily, what are your thoughts? Let me not anticipate this. I have an opinion of what you're going to say, an idea, but go ahead.

Flippen: [laughs] I'm starting to wonder if we're two bad co-hosts here for Industry Focus, because I think our takes are very similar. I was slow to the gun for businesses like Farfetch, I was slow to the gun for Pinterest, and I've been proven wrong on both of those businesses, and I've obviously since changed my tune, but I typically don't get around to doing so until businesses have started to prove themselves out a little bit. I think for the most part that means that I'm maybe a risk averse investor. I give up some of the early gains, but I get in there eventually as I have with Farfetch and Pinterest. I think the same could be true for Poshmark. I could see a year from now circling around this business and having it be wildly successful, especially considering its relative small size in relationship to its market opportunity.

One thing we didn't note that I'll briefly site as one of the reasons I'm a little bit nervous, is that they cite their $90 billion market opportunity as online e-commerce instead of online resale, which is a much smaller portion of that market, so I do have questions about how they perceive to be their position in online commerce. I think I'll put a pin in this for now. I want a few quarters to see how the business results end up being in a post-COVID world that is a business that turns back to being unprofitable as a result of increased marketing spend, and I want to see how their cohorts retain and spend years into the future. I really could be wrong here. I can see myself kicking myself a year or two from now for not giving Poshmark a better deal when it first went public, but this is a business, for me, that I'm putting on the back burner for the time being.

Sharma: Fair enough.

Flippen: Fair enough. Well, again, I tend to be wrong, I tend to be slow to exciting and disruptive businesses, so I could very well be wrong and slow here, but either way, Asit, I appreciate you always taking your time to provide your really valuable insights and your opinion, which sometimes is too in line with mine [laughs] on exciting businesses like this.

Sharma: We'll soon find a topic that we can really just wrestle with, so we'll go after it.

Flippen: [laughs] It'll be challenging, but I look forward to it.

Sharma: Same.

Flippen: [laughs] Asit, thanks again for coming on. For listeners, as always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work behind the screen today. For Asit Sharma, I'm Emily Flippen. Thanks for listening and Fool on!