#32 - Poshmark

Social marketplace focused on apparel goods.

Poshmark - (NASDAQ: POSH)

Poshmark is a “social marketplace” focused on secondhand apparel goods.

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Industry Overview

Key competitors: Depop (acquired by Etsy), ThredUp, TheRealReal, and other secondhand apparel marketplaces.

Poshmark competes with other secondhand marketplaces focused on apparel. There are two types of competitors for Poshmark. The closest and most formidable competitors are other secondhand apparel marketplaces (those mentioned above). The other set of competitors are other secondhand marketplaces that compete in other categories like furniture, home goods, or just compete broadly in the secondhand good industry (Facebook marketplace comes to mind here).

Poshmark or the second group of competitors may encroach on each other’s turf one day. Poshmark may look to expand to other verticals.

Of course, the broader secondhand good marketplace competes with other options such as used items on Amazon, eBay, and some retail stores too.

Business Overview

Poshmark is a “social marketplace” which combines shopping with other features like being able to like and comment on different items for sale. People probably use these features to either save an item to look at later or comment and ask questions about a specific item like “Is this jacket too thick for the fall?” or “Is the color closer to a white or a cream?”

While some of the other businesses mentioned above are also apparel marketplaces, Poshmark seems to have more of a focus on the social aspect. As opposed to buying from Poshmark, you are buying from a seller using Poshmark’s platform. Although other marketplaces have third-party sellers, the seller’s profile isn’t shown so up front and center.

The image below is directly from Poshmark’s S-1:

I think most of this is fluff and doesn’t really give me a differentiated perspective, but I thought it was worth including.

Poshmark takes a 20% cut (or $2.95 if goods are less than $15) of the final price from sellers. If the price of a purchase is $100, the seller keeps $80 and Poshmark takes 20%. Simple business model.

Total Addressable Market

The image below is from ThredUp, another secondhand apparel marketplace. Although the image below is biased in favor of the resale market, the industry is quite large and likely will have a number of winners.

While the chart above shows a massive total addressable market for secondhand goods, it’s worth remembering that this is the chart for secondhand goods not secondhand apparel goods.

It’s also worth recognizing that Poshmark needs to be one of the winning social marketplaces for apparel and then make a big push into other categories such as furniture or home goods. Some of these industries are likely complimentary for the core Poshmark consumer though so that’s also a good sign.

Competitive Advantages

  • Largest marketplace?

    Poshmark is a marketplace and marketplaces do have strong competitive advantages if the business can successfully connect supply and demand in one place. There are other competitors so it’s not a done deal that Poshmark is the winner in this industry.

  • Switching costs for sellers?

    While it’s easy for a buyer to be onboarded to Poshmark’s platform (I signed up in 3 seconds), I wonder how hard it is for sellers to be onboarded onto Poshmark’s platform, connect bank account information, and set up a seller profile?

    The other benefit to these platforms is that sellers may have high switching costs between platforms. Sellers are likely discouraged from switching platforms because sellers develop a following because of the social aspect of this marketplace. Sellers who try to move platforms likely lose their followers and have to start all over again.

    The other aspect that might lead to high switching costs is simply starting your reputation over again as a seller. Buyers want to trust sellers and starting with no reviews may be a hard pill to swallow if the competitor’s platform is only a little better.

Financials

Poshmark had perfect timing for its IPO and raised a bunch of money but got swept up in the growth outflow beginning earlier this year and also didn’t provide guidance for 2021 which took down the stock price even more.

I wish the growth rate was a little bit higher, but this market is also quite large and I believe it could continue growing 15%+ for a number of years if Poshmark’s management team is able to successfully execute its strategy.

Net revenue / GMV takes into account returns and order cancellations which is why the take rate will likely stay below 20% unless Poshmark increases its fees.

What’s Interesting

  • Social marketplace

    I think the social marketplace and just social commerce in general will be a trend for the foreseeable future. I think this social commerce trend will benefit many companies and not just marketplaces. There will be companies built that are the “picks and shovels” for businesses that want to have more of a social graph with their buyers and sellers.

    There are other businesses that are blending social graphs in with commerce and I think it leads to more trust between buyers and sellers and could also lead to higher switching costs as I mentioned above.

  • Valuation?

    Quick napkin math here, but if you assume Poshmark does $332 million in revenue for 2021 (y/y growth of ~26.7%) at 80% gross margins (median gross profit margin past 3 years has been 83.4%), it is trading for 10x 2021 P/S or 12.5x 2021 P/gross profit.

    While these numbers are just a quick estimate of valuation and I haven’t dug too much into the possibility of Poshmark achieving that revenue amount, even if Poshmark only hits $300 million in revenue, it still looks cheap relative to other online marketplaces with above average revenue growth.

    Poshmark is done more than 55% from its 52 week high back in January. This might be an opportunity to dig into this business or industry and understand what the rest of the market may be missing.

Future Questions

  • Expansion outside of apparel?

    Poshmark has already expanded out of its core apparel industry into other verticals like home and pets.

    “Women’s was our first category, followed by our launch of Men’s and Kid’s in 2016. Plus and Petite Sizes were added in 2018 and 2019, respectively. In 2019, we added the Home category, in 2020, we added the Beauty and Toys categories, and in 2021, we added the Pets category. We anticipate adding new categories to expand our product offering and continue to serve demand from our diverse community.”

    While Poshmark continues to expand out from its initial category, it will likely run into more competitors and these competitors might be more established or have a better reputation in its respective vertical. What makes Poshmark win in other categories where other competitors have already been operating for a number of years and have built up more supply and demand on those platforms? What gives Poshmark the tipping point to take over other verticals?

Conclusion

I think these secondhand marketplaces are an interesting business to study. I’ve bought some goods from Craigslist, Facebook marketplace, and other websites, but I still have some questions about the business model. I still think it’s pretty easy to go around the platform considering it’s focused on regular consumers instead of businesses.


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