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3 key things you need to know ahead of the Sezzle IPO

Spectacular growth and ample competition. Here’s everything you need to know about the buy now pay later company Sezzle before it lists on the ASX tomorrow.

In its short history, Sezzle, the buy now pay later (BNPL) company has already notched up some incredible growth in the US & Canada.

If all goes to plan, Sezzle will list on the ASX tomorrow under the ticker symbol (ASX: SZL).

Like the majority of BNPL providers, the company’s business model is deceptively simple. Sezzle offers its customers the chance to purchase an item now, and then pay for it later across four instalments – typically over a six-week period.

Similar to the ASX listed Afterpay, these payments are intended to be short-term in nature, are interest free, can be used for budgeting purposes, and as Sezzle’s website seems to imply: the service is targeted at millennials.

Here’s the top three things you need to know about Sezzle before it lists on the ASX tomorrow:

1. Sezzle is growing and fast

Founded in 2016, Sezzle has already seen some incredible customer and merchant growth.

As is noted in the company’s prospectus:

‘The number of Active Merchants has grown by a quarterly average of 79.3% from 31 December 2017 to 31 March 2019.’

All up, this means that at least 3,321 active merchants are currently using Sezzle’s platform.

More importantly, the company has seen underlying merchant sales rise from just US$1.6 million in the 2018 March quarter, to US$28.3 million in the 2019 March quarter – an increase of more than 1,600%.

Yet it’s not just merchants flocking to Sezzle, customer growth has been even more specular. As the company pointed out in its prospectus, ‘as at 31 March 2019, Sezzle had over 269,800 Active Customers, an increase of more than 4,370% since January 2018.’

2. Risks to consider before the IPO

Though Sezzle has seen some growth in recent times, there remains some key risks facing the company.

Maybe most importantly, the company is still in the early stages of growing its market share in its two key locations: the US and Canada.

Indeed, as the prospectus notes, Sezzle's ability to profitably scale ‘is heavily reliant on increases in transaction volumes and in its customer and retail merchant base to increase income and profits.’

Like many early-stage tech companies, Sezzle has also incurred losses since its founding. In December 2018 the company reported cumulative losses of US$6.5 million.

Ultimately, the above comments underscore a key problem faced by early-stage tech companies that rely on building a large network of users.

While Sezzle was able to grow at an exponential rate from 0 to 269,800 customers; investors will now likely be wondering: how does Sezzle now get to 1 million users, or to 4 million users, for that matter.

This question of growth is further complicated by the rapid increase in competition in the BNPL space.

Although Sezzle is keen to point out that ‘it has a competitive advantage in being one of the first to provide an interest-free, ‘buy now, pay later’ service to the US and Canadian online retail market.’

As competition intensifies and as history has shown us, being first is often not enough to maintain your status as a market leader.

For example, Afterpay Holdings Limited is already growing its US foot-print at a rapid rate and the payments giant Visa Inc (All Sessions) is planning to launch its own instalments based-payments system in the next couple of years.

How the fast-growing Sezzle responds to these threats will potentially be a deciding factor to the company’s success in the long-run.

3. Specifics of the IPO

As noted in the prospectus, 35.7 million CHESS Depositary Interests (shares) were available under the offer, at the price of A$1.22 per share. The total number of CDIs (shares) on issue after the completion of the offer will be 177.9 million.

On an undiluted basis, this puts Sezzle’s market capitalisation at around A$217 million ahead of tomorrow's IPO.

Of course, depending upon how investors react when the company’s stock starts trading, we could see that market capitalisation rise or fall dramatically.

For example, the share price of the most recent BNPL provider that listed on the ASX – Splitit – witnessed extreme volatility in the months following its listing.

In its opening day Splitit Payments Limited traded at just A$0.54 per share. In a little more than a month it had been bid all the way up to $A1.60 per share.

Since then, Splitit’s (ASX: SPT) share price has pulled back significantly and currently trades at $A0.63 per share.

Whether Sezzle faces similar volatility will be for the market to decide. Yet with such impressive growth already – Sezzle is at the very least, likely to get Australian investors talking.

As we noted already, Sezzle will be listed under the ticker symbol (ASX: SZL) and should starting trading tomorrow, July 30.

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