What in the World is a Sezzle?

This one was sent to me and given its up roughly 20x this year, figured I’d give it a look. Sezzle Inc, a Buy Now Pay Later (BNPL) company with a “to the moon” stock chart and all the FOMO get rich quick feels anyone could ever want.

So, should you Buy Now, or Buy Never?

Buy Now, Pay Later in a Nutshell:

The Buy Now, Pay Later model might seem like a consumer’s dream—get what you want now, pay overtime, and all interest-free. But look closer, and a different picture emerges. BNPL companies often charge hefty late fees, trapping shoppers who miss a payment. These fees, marketed as "manageable," can quickly snowball, especially for young or financially vulnerable customers. While merchants cover transaction fees, it’s consumers who bear the weight when a payment slips. The result? A cycle of debt disguised as convenience and gamified with slick apps, beautiful user interfaces, and glamorous marketing.

How Does SEZL Make Money?

Sezzle’s revenue flows through three main streams. First, Transaction Income—fees charged to merchants for processing payments, typically a percentage of each order plus a fixed fee—brought in about $36 million in Q3. They also earn through partner deals, interchange fees, and consumer fees on installment payments. Second, Subscription Revenue from Sezzle Premium and Sezzle Anywhere generated about $23 million in Q3, with consumers paying recurring fees for access to exclusive merchants and broad virtual card use. Finally, Other Income, from late fees, gateway fees, and affiliate marketing, made up roughly $11 million in Q3. Together, these streams brought in about $70 million—quite the price tag at a nearly $2.3 billion market cap, valuing the company at just under 10x sales. I’ll give them credit, moving to a “subscription” model is a novelty, but when you create a subscription just so people can avoid the fees you're charging them, well that’s when I throw the challenge flag.

SEZL’s Value Add to Merchants?

Merchants love Sezzle because it makes consumers spend more money. Sezzle’s “buy in 4,” “buy in 2,” and monthly financing (often with fees from 5% to 35%) encourage shoppers to spend more. And merchants are happy to pay Sezzle’s 5% transaction fee, knowing customers are likely to buy more with BNPL options. According to Sezzle, 40% of their customers would’ve walked away without purchasing if BNPL hadn’t been offered. And while they claim one in three customers improves their credit score, we’re left wondering about the other two-thirds. But for merchants, this doesn’t matter—Sezzle is a great partner as long as customers keep spending. This Company is basically trying to get younger people to spend, spend, spend until they can spend no more. Is that bad? Maybe not. But still, I don’t personally love it.

Didn’t They Just Crush Earnings?

Yes, Sezzle posted a strong recent earnings report. Q3 revenue jumped 71.3% year-over-year, driven by higher purchase frequency and new subscribers, now at 529,000. With around 3 million active users (compared to Affirm’s 15 million), Sezzle also saw profitability grow, boasting a 22.1% net income margin and a record 24.7% adjusted net income margin. Their EBITDA margin spiked to 32.2% from 18.5% last year. But beware of those “adjusted” numbers—Sezzle is adept at adjusting its way to better results. And they’ve raised 2024 guidance, projecting a 20% growth in adjusted earnings per share for 2025. Growth is good and they are getting Millennial types to spend more boosting top line numbers. They recently partnered with Web Bank for financing too.

Proud of The Weird Metrics

Like many early-stage tech companies, Sezzle leans heavily on "adjusted" metrics. They focus on Underlying Merchant Sales—essentially total purchase volume, whether profitable or not. “Transaction-related costs” is another catch-all non-GAAP metric covering transaction expenses, credit loss provisions, and interest—costs that eat up around 45% of revenue. Adjusted net income and adjusted EBITDA round out the numbers. Remember, “adjusted” often translates to “the real numbers don’t look good.” Harsh? Yes. Fair? Also, yes.

Asset Quality Not Improving

Sezzle’s interest-free installment plans typically involve four payments, with the first at purchase and the rest every two weeks. These installment plans, originated or purchased from a U.S. bank, represent Sezzle’s receivables. Managed as a single portfolio of unsecured loans, they’re recorded at amortized cost. By Q3, Sezzle’s notes receivable totaled around $151 million, with 7.5% past due over 29 days, up from 4.48% in Q4 of 2023. Charge-offs rose from $11 million last year to $13 million for the nine months ending in Q3 this year. This is all in a super easy economy with tons of stimulus still sloshing around. I will reserve judgement on what kind of borrowers are missing payments for small ticket items chopped up into 4 payments, but we can assume they’re likely not financially sophisticated at the least.

Lots of Competition

Sezzle operates in a crowded BNPL space with heavyweights like Affirm, Afterpay, Klarna, PayPal's Pay in 4, Zip (formerly Quadpay), and Splitit. Affirm offers interest-bearing loans for big purchases; Afterpay targets younger consumers with spending limits. Klarna’s diverse payment options have a strong U.S. and European presence. PayPal’s Pay in 4 leverages a vast user base, while Zip’s virtual card extends BNPL access. Splitit enables installment payments on existing credit cards, keeping users debt-free from new accounts. With so many options, where’s Sezzle’s moat? I don’t see one.

High Regulatory Risk

The BNPL industry faces scrutiny as regulators grow concerned about debt, transparency, and data privacy. The CFPB wants clearer disclosures on fees, stricter credit reporting, and transparent data handling. Some states may soon classify BNPL as traditional loans, imposing stricter rules. Trump’s deregulation stance could ease some pressure, but BNPL’s risks are bipartisan, so consumer protection will likely remain a focus.

Critics’ $0.02 on the Business Model

Critics argue BNPL encourages debt and financial strain, especially for younger users. Over 60% of BNPL users already have debt (like credit card balances), compounding burdens. Missed payments are frequent, with up to 40% of users reporting at least one missed payment. The model appeals to financially vulnerable Millennials and Gen Z, with around 75% aged 18-34. Many BNPL companies don’t run full credit checks, leaving about half of users in the subprime category and default rates possibly double those of credit cards. Reports show 45% of BNPL users have accounts with three or more providers, making it easy to miss payments. Some companies reportedly derive up to 25% of revenue from late fees, suggesting a business model built on missed payments. With more users complaining, regulators are starting to take notice.

The Verdict

Should be obvious by now—it’s a pass. The business model relies too much on late fees, it’s overhyped, and big players could take Sezzle’s customers anytime. No personal stake here but be cautious of the BNPL frenzy.

PS - When Your Insider Buys Look Like Rudolph’s Nose …

Until next time,

Victaurs