In a dramatic reversal, Sezzle Inc. (NASDAQ: SEZL) saw its shares plummet 34.2% to $117.50 in late-morning trading on Friday, despite reporting second-quarter results that surpassed analyst expectations. The sharp sell-off underscores investor concerns that the buy-now-pay-later (BNPL) company's explosive growth may be cooling in the second half of the year.
Sezzle's second-quarter performance was robust, with revenue of $149.7 million, a 51.7% year-over-year increase and 10.8% above FactSet consensus estimates. Adjusted diluted earnings per share came in at $1.13, up 61.4% year-over-year and 9.7% ahead of projections. Gross merchandise volume (GMV) reached $1.3 billion, up 37.9% from the prior year, while net income surged 47.7% to $40.8 million. The company also reported 854,000 active subscribers, a 76.4% jump year-over-year.
However, the market's focus shifted to the company's full-year guidance. Sezzle raised its adjusted EPS outlook by just 2.9% to $5.25 from $5.10, and reaffirmed revenue growth of approximately 35%, at the upper end of its earlier range. This implies second-half revenue growth of 30.8%, a significant deceleration from the 40.1% growth achieved in the first half of the year.
Investors had been hoping for a stronger flow-through of the company's growth momentum, according to KBW analyst Ryan Tomasello. The implied second-half growth figures, which are derived from the company's guidance rather than official forecasts, suggest a slowdown that has rattled the market.
Despite the deceleration, Sezzle's underlying fundamentals remain strong. Purchase frequency climbed to 7.2 transactions per user, up from 6.1 a year ago, while revenue per monetized user increased by 16.2%. Repeat usage accounted for an impressive 97.2% of all orders, indicating high customer loyalty.
To fuel growth, Sezzle significantly increased marketing spending, which surged 121.1% to $19.4 million from $8.8 million. The company added 140,000 net subscribers in the quarter. CEO Charlie Youakim described the strategy as "hitting the gas in the car just to see how the car reacted," and indicated that spending would likely moderate in the third quarter.
The increased spending did not materially impact margins, with adjusted EBITDA margin only slightly down to 38.8% from 38.9%. Net transaction margin improved to 63.5% from 61.1%, and revenue as a percentage of GMV rose to 11.7% from 10.6%.
The stock's decline on Friday compressed its valuation multiple significantly. With Thursday's close at $178.53, shares traded at roughly 34 times the updated EPS forecast. At the current price of $117.50, the multiple drops to about 22.4 times, making the stock more attractive to value-oriented investors but reflecting the market's concern over growth sustainability.
Analyst reactions were mixed. B. Riley Securities raised its price target to $196 from $141, and Needham increased its target to $172 from $166. However, KBW lowered its target to $155 from $190, maintaining a Hold rating. Overall, there are three Buy recommendations, four Holds, and no Sells, with an average price target of $168, according to Google Finance.
Peer fintech stocks showed minimal movement, with Affirm Holdings (AFRM) unchanged, Block (XYZ) down 0.1%, and PayPal (PYPL) off 1.0%, indicating that Sezzle's decline was company-specific.
Looking ahead, Sezzle faces several risks, including expected credit-loss provisions rising to between 2.5% and 3.0% of GMV, with elevated loss rates among new users. The regulatory environment for BNPL remains uncertain, and if recent user cohorts underperform, marketing payback periods could extend. The company is launching new products, including SezzleCash and Sezzle Send, and executives will be presenting at Needham's fintech event on August 13.
