Poshmark, the multisided platform for buying and selling fashion and accessories, has set an IPO price range of $35-$39, according to its S-1/A filing. At the top of that range, the business will raise $257.4 million. The company will trade under the ticker, POSH, on the Nasdaq Global Select Market.
Q3 2020 hedge fund letters, conferences and more
The Business Model
Poshmark is a matchmaker, bringing together vendors and buyers of fashion and accessories on its multi-sided platform. Vendors and customers experience network effects which manay analysts and the company itself, are hoping will lead to economies of scale and barriers to entry. Poshmark’s earnings come from a flat fee of $2.95 for transactions below $15, and 20 percent for transactions over $15. So, to earn more money, it has to increase the size of its community, and the amount of time people spend on the platform.
Digital platforms are not new. The success of Wondow’s operating system and Facebook’s social media platform, has given investors a taste for platforms and a belief that the momentum driven flywheel of network-effects businesses are on an inexorable march toward economies of scale formidable barriers to entry, which in turn would boost the value of the network. However, research is pretty clear that many platform businesses fail to exhibit network effects and that of those which do, not all enjoy winner-take-all benefits. This is because platform businesses often emerge in high growth markets which give the promise of massive economic profits to the business that can dominate it, and so, many competitors are attracted, all with essentially the same business model, and all who are forced to spend massively in order to undercut their rivals, be attractive to customers and grow fast enough that they will have the requisite market share in order for them to become economically viable. The result are profitless platforms with fast growing revenues.
A History of Losses
Poshmark is typical of many such platforms. Net revenue for the nine months that ended on Sept. 30 2020 was nearly $192.8 million, up a sensational 28 percent from the same period in the year prior. Yet, the platform only made its first quarterly profit for the three months that ended on June 30, 2020. There are two ways to read this: either the world is becoming the kind of world in which Poshmark can be profitable on a regular basis, or, it took a pandemic to make the platform profitable and any return to normalcy means a return to loss-making. In other words, will people continue to shift expenditure online, to the profit of the platform, or will the end of the pandemic pull back the business’ nascent profitability? I do not think there are easy answers for that question.
The retail market is in the middle of two big trends, resale, and social commerce. The two trends are secular and began well before the pandemic struck and the pandemic has always strengthened them, as shoppers have adapted to lockdowns, social distancing and health warnings by doing more of their shopping online. Poshmark is not alone in believing that the “future of online shopping is social”.
According to data from Statista, social commerce sales in the United States in 2019 were $22 billion. Estimates for 2020, made prior to the pandemic, had them at $29.3 billion. The strength of social commerce is seen by the 2024 projections: $82.4 billion. This is a huge addressable market to be in.
Yet, it is that very growth and attractiveness which could harm a platform like Poshmark. Facebook, Instagram, Pinterest, Snapchat, and YouTube, as well as other platforms, have all aggressively pursued shopping features.
Again, we see the effect of competition on Poshmark’s numbers: persistent losses which only turned into profits under conditions of a pandemic. The platform does a lot of business, shifting 130 million products over three quarters, for a total value of over $4 billion.
It is probable that the post-pandemic world will not be a return to normalcy, and given the shift to digital that preceded the pandemic, and the deteriorating economics of many millenials and Gen-Z shoppers, social commerce could emerge stronger than ever. The pandemic highlighted various issues which could coalesce in the platform’s favour. First among these is that the digital transformation which has seen platforms like Airbnb, Poshmark and others rise, is here to stay, Pandemic economics heightened a long-term trend toward more responsible shopping, more conservative spending habits, and less expenditure on luxury goods. China is the only major luxury goods market where luxury goods are expected to grow, elsewhere, spending has contracted for the first time since 2009, declining by 23 percent. Big brands such as Macy’s, Neiman Marcus, and Nordstrom, are all looking for ways to sell their excess inventory, because of the emerging resale market. To win the market, Poshmark will have to execute at a very high level at a time of intense competition in order to consistently earn economic profits for its shareholders. As Warren Buffett is fond of pointing out, technological innovation may benefit customers without making investors rich.
