Shares of Sezzle (SEZL -2.39%) crashed 39.7% in December, according to data provided by S&P Global Market Intelligence. The decline had already begun in November when the company did a stock offering. But it picked up major steam after a blistering short report came out against this business on Dec. 18.
In 2024, Sezzle went from steep losses to big profits. The stock, consequently, was up by more than 2,000% for the year as of November. At that point, management decided to raise some cash by doing a stock offering. This took some of the wind out of its sails — offering more shares can put downward pressure on the stock price.
However, the bigger hit came from Hindenburg Research in December. The lengthy report made many concerning claims. But I believe the statement investors need to consider most was the report’s conclusion, which said, “Its model is simply not sustainable.”
It’s a simple statement but one that Sezzle shareholders need to grapple with nevertheless.
How does Sezzle make money?
Any investor who chooses to buy individual stocks needs to know each company’s business model. This is part of forming a well-rounded investment thesis. In short, investors need to understand how a business works, how it makes money, and the forces that will drive financial results for the long term.
For Sezzle, it’s a buy now, pay later platform allowing its users to purchase things at select retailers in four payments. It makes most of its money from fees charged to merchants. But it also offers users a subscription product that unlocks more features, such as special in-app prices.
Sezzle also caters to people with poor credit, and this is one of the main points that Hindenburg Research emphasizes. Essentially, the research firm says Sezzle is borrowing money at high interest rates and making it available to high-risk users. This is partly why it believes the business model is unsustainable and why it’s short shares — it will make money if Sezzle stock goes down.
What’s next for Sezzle investors?
Give Hindenburg Research a lot of credit — its reports are always quite thorough. And it’s hard for many investors to be thorough enough to independently confirm or deny its key findings.
For this reason, there may be a more practical approach for Sezzle investors. The company’s net income is skyrocketing thanks to its subscription service, making this one of the most important things for the business. And when it comes to this service, Hindenburg appears to suggest the numbers are soaring because users are accidentally signing up — in other words, it’s not true demand.
Investors can watch the subscriber numbers — if demand isn’t real, then one would expect a correction. For example, Sezzle only launched its subscription tier in July 2023, and it now has 529,000 actives. If its subscriber base peaks in the coming months, it could confirm Hindenburg’s hypothesis that signups have been accidental. Otherwise, the momentum could be real, which would point to more upside ahead.
Jon Quast has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Sezzle. The Motley Fool has a disclosure policy.
