It is rare to find a company growing its top line at 76% while maintaining 28% net income margins, and it is even rarer to find it trading at just ~14x forward earnings. Sezzle (SEZL) is that company. Sezzle provides flexible, consumer focused ‘Buy Now, Pay Later’ financing and credit-building tools specifically designed for the underserved market. While the headlines focus on subprime fears and regulatory noise, Sezzle has executed a profitable growth strategy, pivoting to a high-LTV subscription model that self-funds its own expansion. The setup here looks very attractive. You have a founder-CEO, Charlie, who has his entire net worth in the company, owning roughly 44%, 2.4 million pre-split shares (approx. 14.4m post split), and has never sold a share… plus, he regularly quotes Buffett and Munger.

BNPL vs Credit Cards

Probably contrary to most, I am of the opinion that properly run BNPL is entirely more ethical and consumer supportive than credit cards, but the credit card industry has created a sentiment that using BNPL is somehow buying things that you can’t afford when in reality America lives on credit cards that now charge 28% as a standard when it used to be like 12-15%. The amount of headlines citing BNPL usage while ignoring that BNPL has existed for decades in the form of Credit Cards is mind blowing. Headlines citing BNPL use to buy groceries straight up ignore the fact that the majority of American shoppers are swiping their credit cards for everything.

If you polled me, nearly 100% of my spending would be using BNPL in the form of credit cards regardless of the fact that I pay them off weekly and do so for added purchase protection, travel rewards, etc.

Unlike a credit card, SEZL refuses to allow additional BNPL purchases if there is an unpaid balance. They also have the ability to remove buying power instantly in the event of a downturn where credit cards typically need to give 45 day notice.

The CFPB finds that "BNPL imposes significantly lower direct financial costs on consumers than legacy credit products."

BNPL losses are now less than half of the legacy credit cards it replaces signifying the strength of the underwriting.

Charge-offs went back to 2020 stimulus-check era lows, but lenders noted the decrease is driven by "improved credit models" and "shifting focus on increasing usage by their existing customers."

This is SEZL exact model.

Consumer-Sided vs. Merchant-Sided

A few years ago, Sezzle switched from the typical “merchant-sided” BNPL model which works primarily through the seller, to a consumer-sided model which differentiates them from competitors like Affirm. SEZL is inherently focused on being a consumer-friendly, consumer driven experience. They charge the consumer. SEZL’s pitch towards consumers is that it is a financial wellness tool – accessible, budget flexibility, and a way to build credit with Sezzle Up vs revolving Credit Card exposure. The app is extremely user friendly and is a promotional store that encourages return to app for browsing – offering promos, price comparisons, featured products etc.

Merchant Sided: Driven by merchant access and promotion. Merchants participate to increase sales but the BNPL eats into merchant margins to provide a benefit and has inherently lower margins itself.

Consumer Sided: SEZL flipped the script and essentially developed an underwriting and approval process for the consumer. It is consumer-driven rather than merchant-driven.

Because of this, Sezzle operates in the wallet of the consumer. Things like the Sezzle Anywhere subscription essentially allow it to be used anywhere Visa is accepted, rather than the consumer having to hunt for a merchant where SEZL is accepted.

Another notable difference to Affirm is that Affirm is focused primarily on merchant partners that have higher value ticket items. Affirm has much longer term product focus that rivals traditional loans etc with 6-12-24 month plans and interest. They do offer the traditional pay-in-4 but its focus is higher ticket. This is why their AOV is significantly higher than SEZL’s.

Customer

Sezzle targets subprime and near-prime consumers, a bit more ‘risky’ but they are very selective in who they approve and are serving a population that is underserved by both credit cards and other BNPL.

They utilize AI and new infrastructure to risk-assess users that traditional banks reject. SEZL allows users to opt-in for credit reporting and pitch it as a tool to build credit via Sezzle Up. They reward responsible use with increased access, but they have strict usage limits, you cannot use Sezzle if you have an unpaid or overdue balance.

Unlike traditional credit cards that might give a $3,500 limit immediately, Sezzle starts with micro approvals of ~$50 and allows users to increase their lines of credit with responsible usage. The company is big on promoting Sezzle as a budgeting tool to spread a single cost over 6 weeks, not a way to rack up revolving debt at 28% APR.

SEZL says they differentiate themselves with proprietary non-FICO approval methods, monitoring, limits etc.. there is inherent risk here and it comes down to if that is legit or not – if it’s just talk during good times or it will hold up during tough times.

Financials

Management prides themselves on efficient growth, prioritizing profitable growth strategies. One of SEZL core principles though is extremely efficient cost control and expenses. They pride themselves on it to expand leverage. They are a huge turnaround story because their prior business model failed and they had to ruthlessly cut expenses and now they pride themselves on their efficient use of money. On the calls I’ve listened to he regularly refers to how certain companies just burn cash in the name of ‘expansion’

In Q2 Management recently noted: “With top line growth of 76% YoY, gross margins of 61% and a net income margin of 28%, we remain well ahead of the Rule of 40 and our own version, the Rule of 100, where we scored a 165 this quarter.”

History of Raising Guidance: Split-adjusted guidance for FY24 started at $2.00. It moved to $2.50-$3.00, then $3.25, and recently to $3.52. Preliminary guidance for next year is already at $4.35.

Valuation*: We are looking at a ~18.40 TTM and a FWD PE of 14.20 based on FY26 guidance of 4.35 EPS.

PEG Ratio: SEZL is trading at a FWD PEG of 0.60. For reference, a PEG of <1 is generally considered undervalued. (PEG ratio is a valuation calculated by dividing a stock’s Price-to-Earnings (PE) ratio by its expected earnings growth rate, adjusting the PE to show whether a company is undervalued or overvalued relative to how fast it is expected to grow earnings.)

Underlying SEZL’s operational momentum is its balance sheet that separates it from more levered peers. As of Q3, SEZL reports a cash position of $134.7m vs $118m in debt for a net cash position of $16.7m and a healthy Total Debt/EBITDA ratio of 0.76. In addition, the company recently expanded its credit facility to $225m. With an interest coverage ratio of 17x and a Return on Equity of 90%, SEZL is using its capital to efficiently and profitably grow.

While Affirm has recently become slightly GAAP profitable, Klarna has shifted back to a net loss. Sezzle differentiates itself with superior capital efficiency, a ~36% Operating Margin and ~27% Net Income Margin, providing a cushion against macroeconomic headwinds that its high-volume, thin-margin competitors do not possess.

Additionally, SEZL has crossed an inflection point and has been Free Cash Flow positive since Q1 2024 providing ample cash generation for growth and flexibility. To highlight SEZL’s focus on profitability, it is important to note that rapid growth fintech lenders typically have negative cash flow as they send cash out to merchants faster than they receive paybacks. This is not the case with SEZL, despite increasing Gross Merchandise Value by 58%, they continue to post positive cash flow. SEZL’s short payback period of 4-6 weeks allows it to fund organic growth without the need for external cash burn. They are successfully self-funding their 58% GMV growth.

Q3 Earnings

I thought results and call were good. There was a slight uptick in provision for credit losses to 3.1%, but with SEZL new customers get higher provisions as they don’t have a history with the company, it’s almost like a CAC/marketing expense.

Charlie clarified it’s right where they anticipate though, that On Demand also increased it a bit due to more new customers, but that their guidance has been clear and they are in line for full year. He basically said ‘we guided full year and we were under it Q1 and Q2 so that implies it will be higher in Q3 and Q4, that should be understood.’

I also don’t hate small proactive upticks in credit loss provisions, I’d much prefer that than under provisioning for losses as any over provision results in smaller future provisions to balance them out.

Monthly On Demand and Subs (MODS) grew 48% YoY Active consumers grew 11.4%. GMV grew 58.7%

Revenue grew 67% YoY and adjusted net income was $25.4M this quarter, up 53% YoY.

Why is Revenue growing at >60% but active consumers by 12%? Active consumers means they have made a purchase on SEZL. The real driver of revenue growth is subscriptions. It’s much more in line growth rate if you view it from that lens – 67% vs 48%. Last quarter it was 62% YoY MODS (monthly on demand and subs). They were marketing on demand big time as a driver they hoped would convert to subs faster. They noticed the conversion wasn’t happening as much as they liked so they cut back on the marketing spend to pivot going forward, noted as a reason for growth change. Refocusing on prioritizing subs. On demand is still accretive and is offered to people hesitant to subscribe but they want to focus more on lifetime value which is in a sub over on demand. In addition – SEZL mgmt lives by the idea of profitable growth. They stress it on all the calls. Q4 is also historically a supercharged growth quarter because holidays etc. so there will likely be a spike in user growth. I think of Active consumers as “the universe that has been introduced to Sezzle” – this pool was built with growth/exposure first in mind – and then they try to transition them into subscribers – growing the pool of high value long term value consumers. So the “active users” can slow down as long as MODS continues to grow as the margin of MODS is much higher than a transaction consumer. The gap remains 2971-784=2,187 Active Users that are not MODS/Subscribers. MODS is currently 26% of actives. Last year Q3 it was 19.8%. So they are eating into this pie, converting to higher value customers which is driving revenue and profit growth with leverage vs active customer growth.

Revenue can grow faster than consumer base with more subscriptions, more transactions (avg purchase growing from 5.4 to 6.5x). Also, the more transactions the more merchant fees so if customers grow 10% but GMV grows 20% the increased volume results in greater revenue growth via transaction fees. GMV grew 58.7%, subscribers made 10x more transactions, and there is cross selling new products (fee for credit building product etc).

SEZL’s Formula for Leveraged Growth: Base consumer growth + conversion to high value subscribers + cross selling products to increase customer LTV + increase usage/GMV + growing take rate = fuel for revenue growth at leverage greater than base consumer growth. Take rate is 11.2%, increasing 60bps YoY.

With a pivot to higher-margin subscriptions (MODS), a growing take rate (~13%), and a rapidly increasing EPS forecast, I feel Sezzle is fundamentally sound.

Q4/Q1 Accounting

It is important to note, SEZL has some funky Q4 Holiday Season accounting so it is important to bake it into expectations. There were previous sell-offs seemingly based on investor misinterpretations of this.

Q4: In Holiday seasons there is typically a massive GMV spike. Sezzle must provision for losses immediately in Q4 to account for the risk. This depresses the net income for the Q.

Following Q1, Revenue is recognized when paid (fees/payments). Since Sezzle is a a 4-6 week BNPL payoff, the revenue from the Q4 holiday spend is actually received and recognized into Q1. Q1 often shows lower GMV but all-time high Revenue.

GAAP accounting requires them to provision for losses in Q4 but not recognize the revenue until Q1. This creates weird QoQ comparisons, but if you look at the cost of transaction processing relative to revenue, gross margins remain north of 60%.

Risks

There is a valid concern regarding consumer pressure and risks associated with subprime focused lenders/BNPLs. This negative sentiment seems to be particularly high lately with spillover from subprime auto and student loan debt headlines. IMO, BNPL is apples and oranges compared to those long-term debts. Obviously increased downward consumer pressure will ultimately affect all credit type products, but in the short term I think the impact is different.

BNPL is very short term in nature – particularly SEZL – and as management would argue, they are “more of a budgeting tool to spread a single cost across 4 weeks,” rather than a traditional credit product.

1. It’s much easier to pay $120 total over 4 weeks than it is to pay $500 car loan or $300 student loan.
2. Short term in nature provides the ability to resolve in the short term. 4 $30 payments is much more achievable than a recurring $300 and $500 payment monthly for 12-36-indefinite months.
3. BNPL is a conscious decision to spend $X amount of dollars in a single purchase vs having made a probably inappropriate long term commitment to something that is unaffordable.
4. There is almost an anti-student loan sentiment with recent grad unemployment and also a build up of unexpected loan repayment following all the talks about forgiveness.
5. BNPL can also be a symptom/result of those delinquency rates as people turn to non traditional credit as their traditional access is impacted, maxed, or unavailable. And in turn prioritize maintaining access to liquidity of ability to access BNPL for everyday needs by ensuring they pay it off as companies like SEZL do not allow follow up loans without payoff.

Ultimately – i am not arguing BNPL is immune but providing some insights on the lack of visible impact right now. I believe there’s a host of financial and psychological reasons from different perspectives that actually make BNPL resilient to the delinquency numbers we see in things like cars/student loans.

Also – pulling from an old Value Investors Club write-up on SEZL, the author noted that in a conversation with the SVP of IR reflected that: “Sezzle is not afraid of a recession. Their customer is already in distress. Moreover, they expect more people to use BNPL services if the economy goes bad. Because Sezzle’s target is subprime customer they are not afraid of Apple Pay Later or PayPal Pay-in-4 as competition.”

Nonetheless, despite my above points, there is a real risk in the cyclical nature of BNPLs. A recession or prolonged consumer weakness will impact SEZL via GMV compression and credit degradation. SEZL’s revenue is directly tied to GMV and as such, if customer spending contracts, revenue growth could meaningfully decelerate. And while SEZL’s loss provisioning has remained sufficient in the 2.5-3% range, a true recessionary environment will put their underwriting process and credit provisions to the test. Fortunately, because of wide-spread negative sentiment regarding the subprime space, I feel much of this is presently baked into SEZL’s compressed multiple and the upside outweighs the downside risk.

If you are interested in SEZL, I think the current price provides a great entry point with significant upside potential, but keep in mind this stock has proven to be very volatile.