The Bull Case for SZL.

I recently just got my allocation for SZL. A moderate size. There are a few reasons, and I believe it to be a premier growth stock of the ASX.

I believe Sezzle has much more potential than Z1P. Personally, I also believe Z1P's business model to be unsustainable, unit economics are extremely weak, and they have shown lack of innovation and inability to differentiate themselves from Afterpay. This has hampered its ability to gain partnerships and larger clients. I was previously a shorter above $7. If Z1P ever rises above $7, I will probably short it again.

1. Sezzle has shown it has the ability to land large enterprise clients. BigCommerce, LampsPlus, and notably Target US, which are a lot stickier. I believe the Target partnership will be pivotal towards landing future big clients. Current pilot programs are already in the process I believe.
They have managed to differentiate themselves from traditional BNPL providers with a product suite much more tailored towards Gen-Z and Millenials. Notably Sezzle Up and its ability to build credit along with its B-Corp status.

This is the Target checkout screen that was added in July. Currently available for clothing and beauty verticals. I believe Affirm handles the electronics and furniture side of Target, so they are very synergistic. I wouldn't be surprised if Affirm and Sezzle partner in the future, as they specialise in different verticals.



2. They have facilitated long-term lending with partnerships with Ally Lending, and they are partnered with Discover, which provides a huge referral network. They have started to move beyond the Pay-In-4 structure, and the silicon valley mindset of constant innovation and connections are there.

3. Their guidance has always been ambitious but they have a good history of beating guidance without excessive expenditure. Their CY21 guidance is particularly so, $2.5B GMV.

4. Management is in it for the long run. Paradis and Youakim collectively own 50% of the float and they have not sold any, unlike other holders. Reflecting on interviews, they have shown strong confidence in the company's growth trajectory and see value at their current holdings.

5. US Listing will improve volumes significantly, although we will see dilution, this will depend on listing price. I think management will be incentivized to raise at a higher price to reduce dilution on their own holdings. Currently Sezzle movements are mostly tied to Z1P. I believe this US listing will allow Sezzle to break this tether. The short interest for Sezzle is also relatively low, comparable to Afterpay, at around 1%. This means less volatility from short attacks.

6. Sezzle is notably undervalued, if we use FY22E revenues (as postulated by Ord Minett), then they are trading at around 4.5x future revenues at this current point in time. These revenues are completely organic and their unit economics are relatively good.

7. Bad debts are at 3.4% of GMV. I believe long-term, the target is around 2% for this figure, once customers are filtered appropriately through data science. Affirm had a similar strategy, their credit losses were at 9.2% in 2020 but dropped to 5.8% in 2021. When you start expanding into large enterprise clients like Affirm has done, these are unavoidable growing pains. But the problem itself can be reduced quite quickly.

But I believe now that management has seen the wrath of shareholders over this, they will start making amends to reduce bad debt expense, as they have iterated themselves, they have many levers to reduce this. Enacting more stringent requirements will be important. I believe Sezzle should work with Debt Collectors like Affirm has done, and sell this debt if possible.

8. Potential for consolidation and M&A. I believe Sezzle is currently in a good range for a takeover. They have first move advantage in Brazil, India and Canada. Their market capitalization is relatively low and expenses are manageable unlike Z1P.

I think Sezzle and Affirm are definitely a good combination. You can clearly see in Target US, you have Sezzle covering the clothing / beauty verticals and Affirm covering furniture and electronics etc. They are not competing but rather working together symbiotically. You have one targeted towards Gen Z and another targeted towards Millenials+. Furthermore, they can share a lot of data with each other on assessing consumer default risk which would be incredibly synergistic for both as bad debts will eventually become the major expense as it grows with GMV, whereas costs can remain relatively fixed.

Either way, we are about to see the Target and BigCommerce transaction volumes come through next quarter, along with management efforts to reduce bad debt expense. Then we have US Listing news. So plenty of good things in the pipeline I believe. Therefore I have entered at $6, time will tell if my decision is correct or not.