SEZL DD pt.2: BNPL, the most misunderstood industry

My original DD for SEZL is here

Previous post if you haven't seen it yet ^, little update on the BNPL space and DD for SEZL:

BNPL is the most misunderstood concept in the credit space right now. It's not nearly as irresponsible or "set to blow up" as the general sentiment makes it out to be.

1. Standard loan tenor of Sezzle's BNPL average 40-50 days, with AOVs being $100-250.

2. BNPL default rates have historically sat at approx. 2% versus Credit Cards at 10%. People use Sezzle for groceries, gas, and other essentials/semi-essentials. Their card feature is sticky and the access to pay for essentials heavily discourages people from defaulting at these AOVs.

3. Sezzle does NOT make money off of defaulting consumers! The long-term value lies in the consumer who is a repeat user and pays on time. They have kept their PLR steady and recently expanded underwriting to allow for more user acquisition – again, short-term pain for long term customer filtering.

4. Limits and product usage can be changed instantly, versus a credit card limit change with 45 days notice. Ability to react defensively to negative loss trends in real time.

5. CEO noted in recent interview that Sezzle's target base is already low-mid income; consequently the use and repayment of BNPL is more easily attainable and useful for this customer base than paying off a large revolving CC balance.

6. Management from Affirm, Klarna, Sezzle, Zip (BNPL providers) all noted no negative changes in repayment ability – Affirm CEO actually noted that govt. workers simply spent less using Affirm during time of shutdown versus repayment inability rise.

1. Points 1-6 point to the low-risk of these loans compared to CCs, Auto, Mortgages etc. due to the nature of their AOV + importance to the consumer.

2. The misconception that "people will stop paying their BNPL loans first". ZERO data to suggest this. Paying back lower AOV items is a more realistic scenario, along with the fact that BNPL platforms offer liquidity to these consumers in a way unmatched by CCs. People would much rather pay off the $100 loan and keep using Sezzle for their everyday spend than default and lose access forever.

3. Sezzle offers optional credit-reporting which builds credit score and encourages positive repayment behaviour, along with their tier program.

What has overshadowed the share price as of late?

1. Liquidity risk-off from high-beta stocks in recent weeks (late Oct-now)

2. Rising delinquency rates that were guided for, in combination with a weakening consumer sentiment & shaky macro news. Loss rates as of GMV trended from 2% to 3% in recent quarter, BUT guidance was updated for full year loss rates down to 2.5-2.75%, from original guide of 2.5-3%.

3. Compressed net margin from 28% Q2 to 23% Q3 – mostly attributed to increase in delinquency rates, again, were guided for at start of the year. Should not be a permanent effect to margins as they refocus on higher LTV product (subscriptions versus one-time use card). Expecting 25-27.5% stable net margin for 2026. There is SOME real concern here but not scary enough to lose conviction IMO.

Why I believe upside is 100% from here (6m+ hold)

1. Re-shift to subscription mid Q3 netted +80,000 active subscribers. Assume minimum 120,000/Q add for the next 3-4 quarters: this shift will accelerate profitability and high margins despite increased PLR, as subscriptions drive the most LTV and highest margins. Their previous focus in Q1-3 was a lower margin, less sticky product which proved to not be as beneficial, hence the switch. Will be a $15M+ figure addition to their quarterly revenue by Q1-2026.

1.5. Active consumers expected to grow @ 4-6% QoQ & payback period of 6-9 months on marketing spend (8M/quarter) will have compounding effects over the next 4 quarters & beyond.

1. Market conditions and macro sentiment for the sector is in a significant "fear" classification. The fears are not completely unwarranted, but for the most part, blown out of proportion and misconstrued to the BNPL space. This is where stocks get beaten down based on rumour.

2. Continued penetration of consumer acquisition + general BNPL adoption is favourable for increasing active users, and consequently revenue.

3. Trading at 14 NTM P/E growing at 60% YoY revenue & Net Income. History of earnings double beat.

4. Prelim guidance of 4.38 EPS which was sandbagged – management noted this number as guidance in a scenario where negative macro events occur and consumer sentiment/repayment ability is low. Anticipating this to be closer to 4.5-5.

5. As bad as it may sound, their Anywhere subscription is heavily used for essentials – cutting this service out of the user's life would be far more detrimental than to pay it off and keep benefitting from it. End of the day, no different from a Credit Card.

6. Continued adoption of BNPL by consumer and added merchant partners.

Conclusion: QE begins, market sentiment changes to "BNPL largely untouched by credit default fears", company performance will continue to deliver, and multiple expansion will persist to re-rate the company closer to 20-25x NTM P/E.

BASE case: assuming 20-25x NTM P/E: EPS 5.5 NTM @ May 2026: SP of $110-137.50.

BULL case (short/gamma squeeze, unlikely, but happened May 2025): 35-40x NTM P/E, $200+ possible. UNLIKELY by EOY2026.

Positions have rotated into 800 shares. Options IV is way too high @ 90%.

https://preview.redd.it/j64h3qnsip4g1.png?width=1242&format=png&auto=webp&s=c6d048196654e02780abe799b536647d3dd2fbd7