This week we take a look at the red hot BNPL sector and lay out the investment thesis for our preferred pick. Sezzle (SZL.ASX). The stock is up over 200% since we first invested in it, but we still see a bright future for the company and the sector in general. Read on below!
Sezzle (SZL.ASX) is our preferred pick in the BNPL sector. SZL is one of the leading Buy Now Pay Later (BNPL) companies and is fast growing in the lucrative North American market. The business is led by a conservative and innovative management team and, unlike some of its other peers in the sector, SZL is almost a pure play on the largest and most lucrative BNPL opportunity, the United States.
We believe the BNPL sector is here to stay and will only continue to grow as the younger generation (84m Gen Z customers in US) shy away from traditional forms of debt, like credit cards, and take up more of the various BNPL offers available. Unlike the seemingly endless spiral of debt from credit cards, installment type providers offer a better way for consumers to budget and smooth their spending in a more controlled manner. We expect all of the various BNPL providers to benefit from this structural shift for years to come.
Source: SZL Company Filings
As of the end of June 2020, SZL boasts annualised total transactions value (TTV) of $1.1bn, 1.48m customers, and 16,100 merchants with all metrics seeing acceleration. Compared to market leading Afterpay (APT.ASX), SZL is generating similar revenues per customer, yet the market is willing to value APT customers at 3x more than SZL. On all other metrics, such as EV/Revenue and Market Cap/TTV, SZL again appears to be undervalued by a factor of 3x compared to APT. We see SZL continuing to develop new features and services for its customers as it develops itself into a true fintech company rather than just a provider of installment plan credit.
Source: SZL Company Filings
Although we believe APT deserves a premium due to its larger scale and longer track record, we believe the valuation gap will close over time. Furthermore, during June, Zip Money (Z1P.ASX) acquired SZL’s competitor, Quadpay, in the US for $400m. This saw its then combined market valuation increase by a whopping $1.6bn following the deal being announced. SZL and Quadpay share similar metrics, which in our mind back then, further highlighted how undervalued SZL was. We began buying SZL at $1.90 and continued to accumulate all the way up to the $4.00 mark.
We value SZL at about $7.50 based on their recent update and guidance of $1.4bn annualised TTV at the end of CY2020. Taking a longer-term view, we believe SZL will, assuming they execute, triple TTV to over $3.5bn in the next 2-3 years. This would see the company generate revenues in excess of $200m. At that point we believe the stock is worth north of $10.00. We have taken profits in SZL at above $8.00 as the stock appreciated above our near-term valuation. Long term we retain an appropriate position and will look to add again on any meaningful pullback.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.