Hindenburg Research is short shares of Sezzle Inc (NASDAQ:SEZL).
- Sezzle Inc. is a Minneapolis-based ‘Buy Now, Pay Later’ (BNPL) company founded in 2016.
- Its stock is up 2,015% in the last year, driven by investor confidence that it is a growing, profitable business that recently reported 71% year-over-year revenue growth.
- Sezzle trades at a premium 5.5x forward sales multiple, representing a 63% premium to peers, based on these lofty expectations.
- But in reality, our findings show Sezzle is borrowing expensive capital to make extremely risky loans through a struggling platform that is rapidly losing customers and merchants. All the while, insiders are selling stock or cashing out through a massive margin loan.
- Sezzle’s Chairman and CEO has pledged $542 million in shares as collateral for a margin loan, representing ~30% of the company’s total shares, as disclosed in an obscure footnote on page 42 of a September 2024 proxy statement.
- Insiders have sold ~$71 million in stock this year, including a key pre-IPO investor who has reduced their stake by 87%.
- In 2019, Sezzle listed in Australia, where it faced accusations of being highly promotional, withholding negative information from shareholders and engaging in high-risk lending. The stock later collapsed following reports of significant bad debts and speculation of bankruptcy.
- Despite its collapse in Australia, as it prepared for its move to Nasdaq, Sezzle was able to report profitability in February 2023, partly by recording significantly lower provisions for bad loans.
- However, filings show Sezzle borrows at a 12.65% interest rate to lend to extremely high-risk consumers whose credit is so bad that they are unable to access traditional credit cards or loans and use BNPL options for otherwise everyday purchases.
- Sezzle’s earnings growth in 2024 appears significantly driven by rapidly issuing lower-quality loans, despite U.S. consumers already being stretched thin with rising credit card delinquency rates. While Sezzle’s loan book grew by just 6% year over year, its provisions for credit losses grew by 130%.
- Sezzle’s COO and “Head of Risk” has no apparent prior corporate experience, per his SEC biography, and was previously a teaching specialist at the University of Minnesota.
- Merchants are abandoning Sezzle’s platform, with the company reporting only 23,000 active merchants, down 51% since 2021, per its own disclosures. Even these numbers may be exaggerated— we found only 6,776 merchants on its website.
- Despite loud announcements at signing, key merchant partnerships such as Target, Lamps Plus, Bellacor, and Ministry of Supply seem to have quietly failed.
- For example, in October 2021, Target announced partnerships with Sezzle and Affirm where it would directly integrate Sezzle into its checkout. As of December 2024, PayPal and Affirm are the only BNPL options on Target’s checkout.
- Beyond losing merchants, Sezzle has also seen its active customer count decline by 20% since 2021, all while key competitors grow rapidly. Oddly, despite this, the company has reported 2.5x growth in its subscription products, which represented 33% of last quarter’s revenue.
- Sezzle seems to be boosting its near-term subscription numbers with sketchy enrollment practices. The company has faced numerous customer complaints for enrolling users into recurring monthly subscriptions without their awareness, according to user complaints and the company’s own FAQ.
- Consumer complaints about Sezzle are spiking, with the company receiving a 1.1-star average rating and 986 complaints over the last three years on the Better Business Bureau (BBB) database.
- Overall, we think Sezzle has already been left in the dust by peers like Affirm, Klarna and Afterpay. The company has reported rosy numbers using short-term tricks, giving insiders an opportunity to exit. We do not see Sezzle surviving in the long-term.
Initial Disclosure: After extensive research, we have taken a short position in shares of Sezzle Inc. (NASDAQ:SEZL). This report represents our opinion, and we encourage every reader to do their own due diligence. Please see our full disclaimer at the bottom of the report.
Background: $1.8 Billion U.S. Focused Buy Now, Pay Later Business
Sezzle Inc. is a Minneapolis-based Buy Now, Pay Later (“BNPL”) company that was started in 2016. Its BNPL offering is available via an app or virtual card that can be used to pay for purchases.
(Source: Sezzle)
In Q3 2024, the company reported it had 2.7 million active consumers using its application and 23,000 active merchants on its platform.
Approximately 52% of Sezzle’s Q3 2024 revenue was derived from “transaction income,” which includes merchant processing fees, consumer fees, interchange fees, and promotional incentives with third parties.
In the same period, almost 33% of revenue was derived from Sezzle’s two “subscription” offerings, “Sezzle Premium” and “Sezzle Anywhere,” which offer benefits in exchange for a recurring fee.
The company offers these products mainly to consumers whose credit is so bad they are unable to get credit cards or traditional loans. Or, as Sezzle puts it, its goal is to increase “financial inclusion by providing credit to those who often face challenges in accessing traditional credit options”. [Pg. 14]
Sezzle Premium allows consumers to use the Sezzle app at select “premium” merchants for a monthly fee of $12.99. Sezzle Anywhere creates a virtual Visa card that can be used anywhere that regular Visa cards are accepted for a $17.99 monthly fee. Sezzle On-Demand, launched in Q3 2024, creates a one-time use Visa card for a service fee of up to $5.99.
Bull Case: Profitable U.S. BNPL Business Reporting Incredible 71% YoY Revenue Growth
Sezzle’s Stock Is Up 2,015% In The Past Year
Since listing on NASDAQ in August 2023, Sezzle has benefited from the “nascent and growing” BNPL market in the U.S., per its November 2024 investor presentation. [Slide 10]
Sezzle’s total revenue for Q3 2024 rose by 71.3% year-over-year, reaching $70 million. [Slide 33] Underlying merchant sales grew by 40.6% year-over-year, and net income spiked 1,093% year-over-year to $15.4 million, giving investors hope that the company is on a rapid, sustainable growth trajectory.
Valuation: Sezzle Trades At A Premium 5.5x Forward Sales Multiple, A 63% Premium to Peers
Over 200 providers compete in the BNPL space, per FIS’ 2023 Global Payments Report, including specialized and well-established fintech companies like Affirm, Klarna, and Afterpay, as well as traditional banks and software providers.
Sezzle’s valuation has catapulted the company to a 5.5x forward sales multiple, far higher than most publicly comparable peers such as Zip, Dave, and Moneylion.[1]
Only Affirm has a richer premium at 6.1x forward sales. Unlike Sezzle, Affirm has meaningful relationships with large merchants like Amazon, a larger ecosystem of 19.5 million users and over 320,000 merchants.
(Source: Bloomberg)
The company funds much of its lending with a line of credit from non-traditional lender Bastion Management. As of last quarter, Sezzle had $95 million outstanding on its line of credit, which carried an effective interest rate of 12.65%. [Pgs. 4, 17]
(Source: Sezzle 10-Q [Pg. 17])
In other words, Sezzle trades at a premium valuation despite relying on high-interest capital to fund high-risk loans to subprime borrowers unable to get credit cards or access to other normal forms of financing.
Key Red Flag: Sezzle’s CEO and Chairman Has Pledged $542 Million In Shares For A Margin Loan, Representing 30% Of The Company’s Total Shares, Per A Footnote Buried On Page 42 Of A September 2024 Proxy Statement
In September 2024, buried in a footnote in one of Sezzle’s proxy statements, we found a disclosure showing that the company’s Chairman & CEO Charlie Youakim pledged 1.72 million shares, representing 70% of his total holdings, as collateral to secure margin loans.
(Source: Sezzle September 2024 Proxy [Pg. 42])
The pledge was again disclosed in a footnote in Sezzle’s October 2024 proxy statement and represents 30% of the total shares outstanding for the entire company.
Margin loans enable shareholders to extract cash from their shares without selling and without the need to file Form 4s. They are a risky form of debt because if the collateral (shares) drops in value, it could trigger a margin call from creditors and the risk of a forced share sale, which in turn could lead to lower collateral (share) prices.
Typically, it bodes poorly for investors when key insiders quietly take advantage of a way to cash out using a huge portion of the entire company.
Red Flag: Insiders Have Sold ~$71 Million In Stock This Year Including A Key Pre-IPO Investor That Has Cut Its Stake By 87%
Despite Sezzle’s rapid year-over year-growth, insiders have also sold stock outright, cashing out ~$71 million in 2024 alone.
These sales have been led by led by private equity firm Continental Investment Partners. In 2019, Continental served as a key pre-IPO investor ahead of Sezzle’s Australia listing (more on this shortly).
Continental’s partner and co-founder Paul Purcell resigned from the Sezzle board on June 6, 2024. Since then, he has filed 62 Form 4s detailing continued share sales totaling $55.7 million, representing ~87.50% of their total holdings, per FactSet.
Additionally, Sezzle Co-Founder Paul Paradis has reduced his holdings by 43% overall, per FactSet, including open market sales and a gift to a private trust.
(Source: Bloomberg)
Background: In 2019, Sezzle Listed In Australia, Where It Was Accused Of Being Highly Promotional, Enriching Insiders While Hiding Negative Information From Shareholders, And Engaging In High-Risk Lending
The Stock Collapsed After Reporting Significant Bad Debts, With Speculation That It Was Nearing Bankruptcy
Before listing on NASDAQ, Sezzle listed in Australia in July 2019, raising $30 million USD. Sezzle’s listing was initially met with excitement as enthusiasm swept up stocks in the BNPL space, with its shares reaching a peak of AUD $11.60 in February 2021.
Two years after the Australian IPO, in June 2021, a local fund manager, East 72 Holdings, detailed in a lengthy letter how Sezzle was a highly promotional company that (i) hid negative information (ii) underperformed peers (iii) engaged in lending to high-risk customers, and (iv) faced tightening credit on its own balance sheet.
By February 2022, the stock had fallen by over 80%, from AUD $11.60 to AUD $2.00 per share. That same month, Sezzle announced a lifeline for investors—a definitive agreement to merge with larger competitor Zip, another BNPL company based in Australia, in an all-stock transaction valuing Sezzle at AUD $491 million.
In July 2022, the merger was called off as “bad debts have continued to spiral at both companies”, per Australian Financial news outlet AFR:
“The merger termination leaves a cloud over claims that buy now, pay later algorithms would learn faster, leading to better credit decision-making, as their volumes grow. In February, Zip and Sezzle said they would achieve cash savings of $130 million through the tie-up, but bad debts have continued to spiral at both companies.”
After the announcement, Sezzle shares traded to lows of AUD $0.26, with speculation that it would need to file for bankruptcy.
(Source: ASX)
Part 1: From Australia To Nasdaq—The U.S. Reincarnation Of Sezzle Looks No Different
Despite Its Collapse In Australia, In February 2023, Sezzle Reported It Had Miraculously Achieved Profitability, Partly By Reporting Vastly Lower Provisions For Bad Loans
Despite Sezzle’s early struggles in Australia, from Q4 2021 to Q4 2022, Sezzle was able to convert a $25.9 million quarterly loss to a $600,000 net profit. [Pgs. 8, 14]
Around 40% of the change in net income was driven by the company rapidly recording lower provisions for uncollectible accounts, from 3.5% of underlying merchant sales in Q4 2021 down to 1.2% in Q4 2022, which it attributed to better collection and implementation of “Prophet”, its proprietary consumer credit scoring system. [Pgs. 8, 14]
(Source: Q4 2022 Report [Slide 14])
With these fresh numbers in hand, on March 13, 2023 Sezzle announced its intention to move its share listing to NASDAQ. Given that the stock price was still languishing, the company enacted a 38:1 reverse stock split in May, 2023 in order to meet the Nasdaq $4 per share price requirement. Sezzle listed on NASDAQ in August 2023.
Subsequent Earnings Growth In 2024 Appears To Have Been Driven In Part By Rapidly Issuing Lower-Quality Loans
U.S. Consumers Are Already Stretched Thin With Credit Card Delinquency Rates On The Rise
Sezzle’s business model involves borrowing money, then lending consumers that money to purchase goods, generating transaction fees as well as justifying a use case for its consumer subscription services.
To do this, Sezzle holds a BNPL loan portfolio of $151 million in gross loans on its balance sheet, with current allowances for loan losses of 12%. As noted earlier, the loan portfolio is financed by a line of credit with $95 million outstanding, bearing an interest rate of 12.65% as of last quarter. For 2023, Sezzle’s average interest rate on its line of credit was a nosebleed 16.78%. [Pg. 80]
In its most recent earnings call, Sezzle stated its provisions for uncollectable accounts would trend higher in the second half of the year due to seasonality and its decision “to open the funnel to more consumers given the confidence we have in our underwriting models.”
“Open the funnel” seems to equate to simply taking on far more risk.
As of last quarter, Sezzle’s provision for credit losses grew by 130% year-over-year while its loan book increased by only 6% in the same period. [Pg. 5]
(Source: Sezzle Q3 2024 Report [Pg. 5])
Sezzle also reported last quarter that it was increasingly dipping into riskier credit customers.
The company has shirked the precision of traditional FICO credit-scoring models and uses its own proprietary “Prophet” score with only three possible ratings, A, B, or C, with “C” being the worst. The company does not make clear a comparable FICO score range for these buckets.
C-Rated loans, the worst quality, were up 22% year to date, now representing 29% of the portfolio. [Pg. 14]
(Source: Sezzle Q3 2024 Report [Pg. 14])
In tandem with worsening underwriting, notes past due from 1-90 days have spiked by 90% since the end of 2023, now sitting at $25 million.
(Source: Sezzle Q3 2024 Report [Pg. 15])
As Sezzle’s credit metrics show rapidly increasing distress, the U.S. consumer appears to be equally as stretched, with credit card delinquencies increasing steeply.
Given that Sezzle loans to consumers who are often unable to access traditional credit cards due to bad credit, this trend bodes poorly for Sezzle’s $151 million BNPL loan book. [Pg. 4]
(Data: Federal Reserve Bank of New York; Chart: Axios Visuals)
Red Flag: Sezzle’s COO And “Head Of Risk” Has No Apparent Prior Corporate Experience Per His SEC Biography, And Was A Teaching Specialist At The University Of Minnesota Before Joining Sezzle
Given that Sezzle’s core business involves managing its credit risk, one might assume the company’s “Head of Risk” is one of its most crucial C-Suite roles, working closely with the CEO and CFO.
One might have also expected the company to hire an individual for this role with significant corporate lending and credit risk experience.
Amin Sabzivand joined Sezzle in 2018. Prior to that, he received Masters degrees in engineering and financial math and was a teaching specialist at his alma mater, the University of Minnesota. His official SEC biography does not report any prior corporate experience.
Since 2023, Sabzivand has served as head of “Risk, Data, Engineering and Product departments at Sezzle.”
(Source: Sezzle Website)
Read the full report here by Hindenburg Research
