The much anticipated IPO of specialty online retailer Poshmark (NASDAQ:POSH) certainly didn't disappoint. The stock stormed out to a 150% gain on the first day of trading as everyone clamored to get their hands on the trendy e-commerce company. Since the boisterous debut, however, traders have been mostly hands-off.
Poshmark shares have reversed course shedding more than 20% off their day one peak. While the long-term prospects for this up-and-coming e-commerce player are sound, the bumpy ride will likely continue as the stock finds its groove in this market.
What Does Poshmark Do?
California-based Poshmark operates a social marketplace where people buy and sell apparel, footwear, beauty products, and home goods. It resides at the intersection of Amazon and Facebook with shoppers interacting with sellers in a department store setting of both new and secondhand items.
While not associated with former Spice Girl Victoria Beckham aka Posh Spice, the company does cater to a fashion minded customer base that likes to shop for popular lifestyle products. The site has more than 30 million users that are actively engaged in Poshmark's modern take on the thrift store.
Poshmark takes the page out of the eBay playbook in simply providing a platform for buyers and sellers to easily conduct transactions. It does not carry inventory which allows it to keep expenses low and achieve scale quicker than other retail e-commerce platforms.
The company generates revenue by charging a fee on all transactions that take place on its platform. For sales of at least $15 Poshmark takes in a 20% fee and it collects a $2.95 fee for smaller transactions. Given the growth in users, this has amounted to some significant revenue.
According to the offering prospectus, Poshmark raked in $193 million in sales for the first three quarters of last year marking a 28% increase over the prior year period. More impressively, it reached profitability for the first time in the company's history in Q2.
What are Poshmark's Growth Prospects?
Although Poshmark may seem like an eBay knockoff, it is a unique retail brand that is well positioned to benefit from some of the hottest trends in consumer spending. Not only does it stand to grow from the accelerated growth in online shopping spurred by the pandemic, but its emphasis on buyer-seller interaction hits home with an increasing number of shoppers who want to make retail a social experience. Toss in the unlikely growth in demand for hard-to-find secondhand goods and Poshmark is a three-headed growth monster.
Since Poshmark's growth prospects are based on not one, not two, but three of the demographic shifts underway in retail—to online, social, and secondhand—investors should feel good about the stock's long-term growth potential.
Over time, the increasing spending power of Millennials and Gen Zers should make this company a winning retailer. According to Statista, the U.S. apparel and footwear market is forecast to grow at a 10% rate through 2023 and reach $131 billion. By this time, more than one-fourth of sales are expected to occur online.
Meanwhile, consumers are expected to gravitate to e-commerce platforms that offer a more personalized, social experience. Today more than ever people lean on advice from friends, family, and word-of-mouth to inform their shopping decisions. This is especially the case with the key younger generations who also place value on sustainability which is where the interest in second-hand goods comes in. Put it all together, and Poshmark has a powerful customer base that will likely bring the company to new heights by the end of the decade.
Is it a Good Time to Buy Poshmark Stock?
The key ingredient to Poshmark's not-so-secret sauce is the social interaction that takes place on its platform. This allows prospective buyers to discover new and used items and learn more about them by interacting with sellers. It's this social media influenced business model that stands to drive some special growth in the years ahead.
But while Poshmark's long-term investment merits are clear, is the stock too hot to touch right now? It's hard to say which direction it goes from here in the short-term, but it will undoubtedly remain volatile. Although the market has shown a hearty appetite for IPOs lately, it has also shown that emotionally charged stocks can sink in a heartbeat as traders rotate to the next greatest thing.
In the early days of a hot IPO such as Poshmark, short term traders often jump in early with the intent to sell once things gets overheated. This appears to be the case here. For this reason, it may be best to let Poshmark cool down before taking a position. Let the stock develop some trading history. Over time it will then be easier to identify opportunities for entry based on technical patterns or valuation.
So, for now, investors with the long-term in mind should consider letting the selloff play out. If the stock starts to head back towards its initial pricing of $42 per share, this would be a great chance to get in secondhand on a long-term retail winner at a much more favorable price.
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