Poshmark Is A Waste Of Time For Sellers

Mar. 18, 2021 10:57 AM ETPoshmark, Inc. (POSH)EBAY, EBAYL, META, TDUP, WISH14 Comments7 Likes
Alex Pitti profile picture
Alex Pitti
3.58K Followers

Summary

  • Poshmark stock has cratered down to earth after a euphoric first day of trading.
  • The long-term outlook is questionable because it charges the highest marketplace fees and faces extreme competition from all angles.
  • Social selling is a major time hog for sellers. It makes it not worth the hassle for many sellers. This is a business. Time is valuable.
  • The company will struggle to be profitable and trades at a high price to sales multiple.

Online Shopping. Positive Black Girl Using Laptop and Credit Card At Home
Photo by Prostock-Studio/iStock via Getty Images

Introduction

Poshmark (NASDAQ:POSH) is a social marketplace for selling used goods. I think of it like if Instagram (FB) and eBay (EBAY) were combined. This is a dog-eat-dog industry where each marketplace is trying to get the most users. Once a platform has a lot of users, it can use that moat (network effect) to charge higher fees. The problem is it’s so easy to switch to buying & selling on a new app, that the moat might not last long. Currently, we are in a very competitive market where investors are hoping they pick the winner. When an e-commerce company reports weak sales results, its stock crashes because if it doesn’t acquire users quickly, it will die. That’s what happened to Poshmark earlier this month when it reported mildly weak guidance.

The other problem with Poshmark stock was there was immense euphoria on the day of its IPO which was unsustainable. Initially, the company said it would sell shares between $35 and $39. Then it listed at $42 per share. It opened at $97.5 and closed the first day at $101.5. It has been downhill since then. The stock has fallen 55.54% to $45.13 on March 17th. The initial bump on its first day of trading ended up being bad for the company. It’s still slightly above its IPO price and solidly above its initial range, but investor sentiment has gone south.

Macro Picture

If investors continue to give credit to growing e-commerce companies, this stock could easily find near term support at its IPO price. As you can see from the chart below, low quality growth stocks have been winners since the March 2020 bottom. However, the company might struggle when it faces tough comps later this year. Once the pandemic is over, e-commerce sales growth should slow. Furthermore, consumers might spend less time on social media and have less time to sell used items. On the other hand, I think spending on clothes should increase. More social gatherings and in-person working should increase spending on apparel.

Source: Vanguard

Thesis: High Competition & Too Much Work For Sellers

In the long run, I don’t think investors can bet on Poshmark gaining enough users to formulate a moat which generates consistent profits. It’s not difficult to see resale growing because it’s cheaper and greener. The internet makes it easier to sell used items to anyone in the world. On the other hand, it’s incredibly difficult to determine if the future of resale commerce is actually social.

Poshmark paints a picture where buyers and sellers interact constantly to make the most optimal transactions for both. However, there is a major time cost to selling on an app with social features. Sellers want to make sales with the least effort possible. If you need to interact with customers constantly, grow a following, keep up with posting your closet, and learn about new changes to the app, it’s incredibly time consuming. Active users spent 27 minutes per day on the app in 2019.

I wouldn’t brag about the amount of time people were spending on my app if I was running a resale website. You want buyers and sellers to like using the app, but this is a business for sellers. Small time sellers who are selling just a couple items aren’t going to want to invest a lot of time just to make a small amount of money no matter how ‘fun’ it is. For large sellers, this might be their job. Spending extra time on the app is a major cost.

Source: The Sensible Fay

Apparel Competition: ThredUP

It’s difficult to review every app/website Poshmark competes with because there are so many. That’s a bad sign. Some of its competitors have larger user bases. Either a company is extremely niche and only caters to a small market or it sells everything which means its features might not be perfect for each category. Niche websites have a captive targeted audience, but they have a small addressable market.

Poshmark started out as a clothing resale website for women. It added men’s & children’s clothing, home goods, toys, and beauty products. The company is desperate to add new items to sell and to enter new countries to grow. It is now launching in Australia.

There is a risk the website gets watered down with so many new options. It competes with ThredUP (TDUP) which only sells used apparel for women and children. ThredUP can more easily cater to the needs of this vertical which makes it tough for Poshmark to maintain its original turf. ThredUP sells the clothing for sellers; it’s free to receive and ship clean out kits (bags sellers use to send their items to ThredUP).

On the other end, Poshmark competes with Mercari, OfferUp, eBay, and the Facebook Marketplace which sell a wide variety of goods. Facebook is the biggest social network in the world; eBay has been in the resale business for decades. Mercari and OfferUp are new companies like Poshmark.

In comparison with ThredUP, Poshmark gives sellers more control which also means it requires more effort. ThredUP is a traditional online website, not a social network. You send the items in and get paid when they sell. The negative with ThredUP is they don’t accept everything. On Poshmark the negative is it might take a long time for items to sell.

The fact that there isn’t a selection process on Poshmark makes it tougher to get your items to surface to the top of consumers’ feeds. To make the algorithm work for them, sellers must gain a lot of followers which is difficult. Consumers without popular Poshmark pages can sell via traditional social channels. However, if you’re just selling to your Instagram followers, you might want to cut out the middleman which is Poshmark.

Poshmark also has “parties” which organize listings in events to better help sellers surface their items to customers. While this is a neat feature, sellers need to constantly use the app/website to add their items to parties. ThredUP’s fees are hidden because it does the selling. The image below shows the payout percentage of the item’s original price.

Source: ThredUP

While some might consider ThredUP too selective in terms of the brands it chooses, they’re only reacting to what will sell. It’s not as if you will be able to sell a weak brand at a great price on your own. Poshmark charges sellers $2.95 per item under $15 and 20% for sales over $15. Plus, you must pay a flat rate of $7.45 for shipping (it was $7.11 last year).

Established Competition: Facebook & eBay

I won’t compare Postmark’s traffic to ThredUP because Poshmark is more user intensive as a social network and it sells a wider variety of items. I also won’t compare it to Facebook’s traffic, but I will compare it to Facebook Marketplace. As of 2018, Facebook Marketplace had 800 million monthly active users. It probably has over 1 billion now given Facebook’s growth and the size of its user base it can convert to Marketplace.

Poshmark has 31.7 million active users, 6.5 million active buyers, and 4.5 million active sellers (users & sellers as of September 30th; buyers as of December 31st). In Poshmark’s defense, Facebook is in 70 countries, while Poshmark is just in America, Canada, and Australia (just launched).

Facebook charges sellers 5% for items more than $8 and a flat fee of $0.40 for items $8 or less. This fee is for taxes and payment processing. It is lower than Poshmark’s fee and Facebook has dramatically more users. Poshmark could have decided to stay focused on apparel to differentiate itself, but it focused on category growth instead. This pushes it up against giants like Facebook and eBay.

Poshmark is also way smaller than eBay which is an established player. eBay has 185 million total active buyers and 19 million active sellers. Furthermore, eBay charges users less. eBay charges users a 10% sales fee and a 3% PayPal fee. It’s not great for Poshmark that while it’s focusing on user growth, it still can’t charge less than Facebook and eBay. You would think it would be able to raise fees after it becomes large enough to have a moat (network effect), but it’s already charging more than its mature competition.

Direct Competition: Mercari & OfferUp

According to SimilarWeb, Poshmark’s website had 38.89 million visits in February. On the iOS App Store, Poshmark is the 13th most popular shopping app and the 122nd most popular app overall. Mercari’s website has 99.6 million total visits in February. It’s the 14th most popular shopping and the 125th most popular app overall. Mercari was founded in Japan in 2013 and Poshmark was founded in America in 2011. Poshmark had a head start, but it’s smaller in terms of website visits.

Mercari charges a 10% sellers’ fee and a 2.9% processing fee plus 30 cents. For a $40 item, a Poshmark seller makes $32 and a Mercari seller makes $34.54. However, it costs more to ship on Mercari. A blog post comparing the two estimates it costs $10.4 on Mercari to priority ship a 5-pound bag via UPS ($7.54 flat rate on Poshmark).

OfferUp had 24.46 million total visits to its website in February. That’s smaller than the other two, but it makes up for that with amazing app stats. OfferUp is the 5th most popular shopping app on the App Store and the 53rd most popular app overall.

In March 2020, it combined with Letgo to reach 20 million monthly active users. OfferUp was founded in 2011 and Letgo was founded in 2015. The acquisition really helped the company scale. I wouldn’t be surprised if there were more mergers in this hotly contested space. OfferUp’s fee is a minimum of $1.99 or 12.9% of the sales price. Once again, this is cheaper than Poshmark.

The image below shows shipping costs with OfferUp as of 2019. On Mercari, it costs $4.99 for an item under 16 ounces, $8.3 for a small box, $15.05 for a medium box, and $12.10 for a large box. Each marketplace makes deals with shipping companies to lower costs. Which marketplace is the cheapest to ship seems to vary depending on the year, the location, the weight, and the dimensions of the package.

Source: OfferUp

Poshmark Is A Time Hog

Poshmark acts like a social network, but it’s different in the sense that social networks want people to spend more time on their apps, while Poshmark should want to be efficient for sellers. It takes a ton of effort to constantly share listings and add them to parties. It’s not worth the hassle.

Clearly, Poshmark wants buyers to spend as much time on the platform as possible, but if that becomes too much work for sellers, it ends up being a negative. 27 minutes is a very long time for active users to spend on the app. Users on Wish (WISH) spend about 9 minutes on it. The comment below is from a Reddit seller in 2017. She said,

“I used to share all my listings every day, usually multiple times a day - sharing my listings to the appropriate parties, sharing other people's listings. I read all the blogs and online tips for how to best share and at what times etc. I never noticed any difference in sales.

And now I'm just so sick of it. I barely share my listings every other day, it's just so onerous. And the app on my phone always crashes if I try to do it too quick. I hate that it's a race to the bottom because I'll never be one of those girls who shares 1,000x a day. There's simply not enough money to be made on the site for that sort of effort. To date, I have net profit of about $2k.

I won't quit the site, yet. But my year experiment is almost done and I made way more money on eBay by a 7 to 1 ratio and frankly it takes less time to be on there.”

Poshmark is headed in the exact wrong direction if it wants sellers to spend more time on the app. eBay won her business by making it efficient to sell items. The huge time hog that social selling is makes me wonder if the future of resale e-commerce is social like Poshmark claims.

Margins

I’m worried about Poshmark’s margins in 2021 once we exit the lockdown period which e-commerce benefited from. Poshmark being a time hog wasn’t as big of a deal for sellers in 2020 because they were stuck indoors more than usual. Online social connections were the only thing a lot of people had access to.

In 2018 and 2019, Poshmark had adjusted EBITDA margins of -7% and -18%. Its adjusted EBITDA margins jumped to 13.1% in 2020. Analysts don’t think the company will be profitable in 2021 or 2022. It’s hard to value this business. On the one hand, it is spending to grow. On the other hand, it charges higher fees than its competition yet still isn’t profitable (outside of 2020 which was an unusual year).

Takeaway

Poshmark was its own worst enemy by getting so much investor hype around its IPO. The stock has crashed since its first day of trading, but it’s actually still above its IPO price. The stock market has rewarded low quality growth companies since the March 2020. That could help the stock form a short term bottom.

I’m more concerned with the long term. I’m bearish on Poshmark because it faces too much competition and its social marketplace is too onerous for sellers. Its sales growth is coming from expanding the number of categories that can be listed on the platform and entering new markets. Expanding beyond clothes opens it up to be flanked by competitors who still are only selling clothes such as ThredUP.

Now, Poshmark competes with eBay and Facebook Marketplace which is brutal. It’s also competing directly with Mercari and OfferUp. Poshmark charges the highest marketplace fees to sellers, yet it hasn’t been profitable outside of 2020 which was the perfect year for online retail. 2020 was uniquely good for Poshmark because people had more time to sell items and wanted any social connection they could get.

I’m worried adjusted EBITDA margins will fall back down to earth in 2021. Despite the large drop since its first day of trading, the stock is still expensive. It trades at 10.23 times 2021 sales.

This article was written by

Alex Pitti profile picture
3.58K Followers
I am a generalist investor who is willing to do the research in anything I can become competent in. Lately, that has been value stocks because of the speculation in growth (anti bubble thesis). I write about the macro economy for upfina.com. I share my portfolios each month on Twitter (taxable & IRA). It's usually in my pinned tweet.
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Disclosure: I am/we are long WINA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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