2020 was an incredible year for shares of the fastest-growing companies. Some growth stocks doubled. Some tripled. Some delivered even bigger returns.
The bonanza now appears to be over. Many growth stocks are crashing, wiping out a big chunk of their 2020 gains. Ultra-high valuations, rising interest rates, and the coming end of the COVID-19 pandemic could all be playing a role in the decline. No one knows how bad it will get or how long it will last.
I'm not a growth investor. I'm drawn instead to stocks that are underappreciated, underestimated, and disliked. But given the recent decline in growth stocks, those two styles are starting to converge. If this continues, I may soon be adding some former highfliers to my portfolio.
One growth stock that has caught my eye is Poshmark (POSH +0.00%). I haven't pulled the trigger yet, but I like the business.
Image source: Poshmark.
Combining e-commerce and social media
Social shopping platform Poshmark went public earlier this year. It has not gone well. The stock is down a whopping 68% from its all-time high, and it currently sits below its IPO price.
Poshmark makes it easy for users to buy and sell secondhand items, mostly clothing and accessories. Social features are built right into the platform. Users see a curated news feed of listings, can like and share postings, and can negotiate prices with sellers. More than 30 million users engage in over 20 billion social interactions each year.
Poshmark takes a 20% fee on every sale of $15 or more, and a flat $2.95 fee on smaller sales. The huge base of potential buyers engaging on the platform draws in sellers. Those sellers then increase the product selection and make the platform even more appealing for buyers. This cycle helped drive a 20% increase in active buyers in 2020 despite Poshmark slashing its marketing spending due to the pandemic.
What's more, many users end up both buying and selling on Poshmark. The platform has become a useful tool for periodically refreshing one's closet. Traditional consignment shops are competitors, but they typically take a much larger fee.
About $1.4 billion worth of items sold on Poshmark in 2020, a 29% increase from 2019. This generated revenue of $262.1 million for the company last year. Poshmark turned a GAAP net profit of $16.8 million, largely due to the temporarily lower marketing expenses. Profits may slump or vanish as the company ramps up marketing spending to drive growth.
Poshmark is still not a cheap stock, trading for about 10 times sales. It's too expensive for me right now, but I'll be interested if the stock keeps falling. The growth opportunity is significant: GlobalData estimates that the market for resale will grow from $7 billion in 2019 to $36 billion by 2024. Poshmark will need to expand its product categories and successfully enter international markets to capture that growth, and it will have to fend off the e-commerce advances of social media giants like Facebook and Pinterest.
Poshmark has a bright future if it can keep its users engaged. Its lofty fees may come under some pressure down the road, but for now, the company is having no trouble attracting users despite the 20% cut. At the right price, I'll be adding Poshmark to my portfolio.
