News that Zip, an Australian buy now, pay later (BNPL) company, intends to buy Sezzle, a U.S. company of similar ilk, caught our eye this morning. Both concerns are public in Australia, which means that the deal provides a fascinating window into the real value of this particular sort of fintech revenue.
TechCrunch has covered more BNPL startup funding rounds than I can hold straight in my head. The global fintech boom brought with it a parade of checks for startups building installment credit options under the BNPL aegis in recent quarters, meaning that our keyboards have been busy.
For example, MarketForce raised $40 million last week, Alma raised $130 million earlier this month, Ascend picked up $280 million in equity and debt capital in late January, BillEase raised $11 million in mid-January, ThankUCash raised $5.3 million for its fintech work that includes BNPL, and Lipa Later is targeting new markets for its BNPL services after raising $12 million. And that’s merely what I found with a quick scan of TechCrunch this morning.
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It is clear that venture interest in BNPL-focused startups remains incredibly active. But as The Exchange explored earlier this month, the value of some public companies in the sector has suffered. For example, the value of U.S. BNPL giant Affirm has suffered mightily in recent quarters, shedding the majority of its value.
To see a combination in the space, then, means that we’re not seeing BNPL tie-ups at market highs; we’re seeing the Zip-Sezzle deal at market ebb, instead.
Let’s parse the deal’s terms and sort out what the public markets are saying BNPL incomes are worth. For the myriad startups chasing what they hope to be fat profits and valuable cash flows from offering installment credit, the day’s news is more than important; from a valuation perspective, it could prove existential for some.
What’s BNPL revenue worth?
When we examined Affirm earlier in the month, we noted that its take-rate, or revenue as a percentage of gross merchandise volume, was falling over time. From a peak of 12.7% in the company’s Q4 of its fiscal 2020 to 8.1% in its most recent quarter, the second quarter of its fiscal 2022.
Zip is facing similar headwinds, with its “revenue margin” slipping from 7.1% in the back half of 2020 to 6.9% in the first half portion of 2021 to 6.7% in the last six months of last year.
BNPL companies, then, appear to be losing their ability to claim part of their aggregate transaction volume as income; this is not a surprise, given how competitive their market is proving to be. Seeing pricing pressure in busy sectors is a good thing for consumers — and marks a maturing of the product in question.
With that as our backdrop, let’s talk about the deal.
Sezzle shareholders will receive 0.98 Zip shares for each Sezzle share that they own. The transaction places a value on Sezzle of around AUD$491 million, per the deal announcement. Here’s how the pricing stacks up compared to recent values at the public companies, per an investor presentation:
[The transaction] values Sezzle at a 22.0% premium based on current spot prices A$1.78 (Sezzle) and A$2.21 (Zip) as of 25 February 2022,
and 31.7% premium based on 30 day VWAPs
VWAP, of course, stands for volume-weighted average price, calculated in this case on a five-day basis.
Regardless, AUD$491 million is $354.4 million at current exchange rates. So, what is Zip getting for its all-stock deal? Per Sezzle IR, here’s the mix (pulled from the company’s Q4 2021 update, not its full-year 2021 data):
- GMV of $561.0 million (+79.4% YoY)
- Revenue of $32.9 million (+49.1% YoY), or 5.9% of GMV
- $78.9 million in cash on hand
Keep in mind that Sezzle is not profitable, posting a $75.2 million comprehensive loss in 2021. So, the above results aren’t coming on the back of income, but continued losses at — investment in — the business.
Let’s annualize Sezzle’s Q4 numbers to forecast 2022 and get more useful metrics:
- $2.24 billion worth of GMV (above Sezzle’s reported $1.81 billion in 2021 GMV)
- $131.6 million worth of revenue (above Sezzle’s reported $114.8 million in 2021 revenue)
With a sale price of $354.4 million, Sezzle is worth about 2.7x its revenue run rate, or around 16% of its GMV. That’s, well, pretty modest. Almost surprising.
Affirm is worth $11.5 billion as of the time of writing. And in its fourth quarter, it generated revenues of $361.0 million from GMV of $4.5 billion. That means that Affirm is worth about 8x its annualized revenues and about 1.5x its annualized GMV. What gives?
Two things, I think. Something that Zip stresses in its agreement to merge with Sezzle is the latter’s access to the U.S. market. Which is huge, at around a fifth of the global BNPL market, per Zip estimates. Affirm is already huge in America, which means it is operating in a key market from a position of strength. That’s valuable.
And, second, Affirm has a higher take rate than what the smaller Australian companies currently enjoy. That means it’s deriving more top-line per dollar of GMV that flows through its service. That’s good for Affirm, as it can generate more income to cover its costs from a matched chunk of consumer spending. That’s valuable.
But the huge gap in worth between BNPL revenues at Zip and Sezzle and Affirm should give BNPL startups pause. Is your startup more like Affirm or more like its smaller competitors? And if you are priced more like Affirm, why? Do you deserve the premium?
The final wrinkle in all of this is that some BNPL startups raised when Affirm stock was not at $40 per share, give or take, but $175, its peak set last year. For those startups, they had best hope that growth is ahead of expectations, or their next round is going to be a fight.
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