Despite the fact that Poshmark (NASDAQ:POSH) wrapped up a solid year in 2020, its stock is now down 60% from its peak. The social commerce platform went public in January and has seen both a meteoric rise and a rapid decline in its short time on the market.
But with the company now valued at about $3 billion, this might be a great opportunity for long-term investors. Let's see why.
What does Poshmark do?
Poshmark is a consumer-to-consumer social commerce marketplace. An emerging trend in the U.S., social commerce combines both social media and e-commerce. For people looking to clear their closets or establish a social brand as a seller, Poshmark is the place to go. Users can be both buyers or sellers, and each user sees a feed of offers similar to a traditional social media experience.
Thanks to Poshmark's position as the most successful online clothing resale platform, it's able to charge an abnormally high take rate. On orders of more than $15, Poshmark takes a 20% fee on the final price, and on transactions below $15, it takes a flat $2.95 fee. For comparison, Shopify, the e-commerce website builder, takes a 2.9% fee plus a $0.30 charge for transactions on its basic plan.
Poshmark can command a higher take rate, because it provides sellers instant exposure and a guaranteed audience. It has steadily grown its active buyer base by more than 140% over the last three years and now reaches roughly 6.5 million active buyers. In addition to the sheer size of the audience, Poshmark users are fairly active as well. The company stated in its IPO prospectus that users spend about 27 minutes a day on average engaging with its marketplace. With so many eyeballs constantly on the platform, sellers can list items with a sense of confidence their merchandise will a wide swath of potential buyers.
2020 and the year ahead
In 2020, Poshmark generated $1.4 billion in total gross merchandise volume (GMV) across its platform. That volume translated to $262 million in revenue, 28% more than the year prior. Although it is still a relatively young company, its business model has demonstrated an ability to generate strong profits. To supplement the strong growth in revenue, Poshmark generated $83 million in free cash flow for the year, or a 32% free cash flow margin.
Another benefit of Poshmark's platform is that it isn't really selling anything. It is simply aggregating users and enabling them to sell to one another. This means, unlike traditional retailers, Poshmark isn't required to carry any inventory. According to its year-end balance sheet, 92% of the company's total assets are either in cash or marketable securities that Poshmark can put to work.
To piggyback off of its success in 2020, Poshmark also announced its expansion into new categories and new markets. In February, the company announced that its marketplace was officially available in Australia, its first market outside of North America. Poshmark followed this up by launching a new category for pets. The company says 67% of Americans are pet owners, and new and used pet accessories and supplies will now be available to Poshmark buyers.
On top of its own initiatives, the company should also benefit from industry tailwinds. According to eMarketer, the number of social commerce buyers in the U.S. is projected to cross more than 100 million by 2023. Amid plenty of competition from companies like Facebook and Pinterest, Poshmark's blend of social commerce adoption and its own efforts led it to issue strong guidance of 34% year-over-year revenue growth for the first quarter of 2021.
Is this the time to buy?
With the stock now down 60% from its all-time high, Poshmark trades at a market cap of roughly $3 billion. That puts its multiple of price to trailing 12-month sales at about 12, and it has a price to free cash flow multiple of just over 30. That's far cheaper than its social commerce peer Pinterest, which trades at 26 times sales while earning a sub-1% free cash flow margin.
Despite the stock's current decline, Poshmark's underlying business is operating efficiently across the board. Between this solid performance, clear industry tailwinds, and a relatively reasonable valuation, the company's future certainly looks bright.