Is ThredUp’s IPO a Buy?

ThredUp is attempting to ride a wave greatly strengthened by COVID-19.

Encouraged by the growth of the secondhand clothing market on the Internet over the past year, ThredUp filed for its initial public offering or IPO with the Securities & Exchange Commission (SEC) yesterday. Skeptics say ThredUp is betting on a temporary pandemic shopping shift, while the company claims the secondhand trend is a winner regardless of the coronavirus.

What’s the real scoop on the soon-to-be-public company’s prospects?

ThredUp

IPO Interest

7

What is ThredUp?

ThredUp is an online secondhand clothing retailer in 2009 in Oakland California.

Expected IPO Date:

March 2021

Bull Case

  • Secondhand clothing is gaining widespread acceptance with 70% of consumers reporting they viewed secondhand clothing favorably.
  • Thredup active buyers are increasing at a faster rate than its sales, indicating growing interest in the platform.

Bear Case

  • ThredUp is only growing at 14%, a lower rate far lower than many other upcoming IPOs.
  • The company could be benefitting from trends during Covid that aren’t sustainable once the economy full re-opens.

ThredUp Going Public: What its IPO Filing Says

Aiming at both thrift and sustainability, younger clothing shoppers are ThredUp’s market, and the company, founded in 2009, thinks it has a winning hand. In the introduction to its SEC Form S-1 filing, ThredUp states “we are in the early stages of capitalizing on a large market opportunity in secondhand clothing.”

It goes on to describe how its business model builds customer loyalty, too, creating a “flywheel” effect in which “buyers become sellers and vice versa, deepening the attachment rate to our service.”

With ThredUp serving as a marketplace bringing sellers of secondhand clothing and buyers together, it says it spends nothing on direct marketing to bring in sellers. It also states 77% of its sales come from repeat sellers and 80% involve repeat buyers, while it has handled the sale of approximately 100 million items so far with a 69% gross margin.

Key Business Metrics for ThredUp

METRIC 2020 FIGURE Y-O-Y CHANGE
Revenue $186 million +14%
Net loss $47.9 million +$9.7 million
# of Active Buyers 1,240,000 +24%
# of Active Sellers 428,000 -4%

While ThredUp’s revenue is gaining robustly and active buyer numbers skyrocketed during the year, it also racked up a bigger net loss of almost $10 million. The slight decline in active sellers may be less important as a few less effective sellers quit the site.

What Stock Symbol will ThredUp Use After its IPO?

ThredUp registered a sale of $100 million worth of common stock for its IPO along with the prospectus, but this is probably a placeholder, according to Bloomberg reporting. Bloomberg says a more likely value is between $200 million and $300 million. Morgan Stanley (NYSE: MS) and Goldman Sachs (NYSE: GS) are serving as underwriters.

ThredUp intends to use the ticker (NASDAQ: TDUP).

Secondhand Clothes: A Growing Market

Now let’s take a look at how well the market actually supports ThredUp’s bullish prospectus claims, which revolve around its assertion “more millennial and generation Z consumers are driving the shift to secondhand each year.” If there is indeed a strong trend separate from COVID-19 impacts, that will help answer the question, is the IPO a buy?

Research seems to indicate online secondhand clothing sales first got major traction during the financial crisis of 2008 to 2009. Not coincidentally, this is when ThredUp was founded to address the growing demand. Now, millennial and Gen Z consumers have more money in their pockets and are interested in secondhand clothes both for affordability and environmental sustainability reasons.

GlobalData Market Survey reported in summer 2020 that online secondhand was indeed already strong and growing pre-pandemic, with resale both online and offline generating $7 billion a year before COVID-19 and the figure expected to balloon to $36 billion by 2024, with an approximate 39% compound annual growth rate (CAGR).

Forbes reports 45% of consumers were favorable to buying secondhand in 2016 and 70% by 2019, showing solid momentum in the trend. Forbes also reported secondhand accounted for 3% of all clothing purchases in 2009, growing to 7% a decade later and expected to top 17% by 2029. The famous financial magazine said ThredUp itself is helping to drive the trend by offering an effective marketplace for sales.

Is ThredUp’s Stock A Buy or a Pass?

The two cautionary notes for investors eyeing ThredUp’s IPO are its continuing (and, in fact, growing) net losses, and the tendency of late-2020 and early 2021 IPOs to generate massive share spikes right out of the starting gate.

However, ThredUp does indeed appear to be strongly positioned in an explosively growing market, one boosted by COVID-19 but not dependent on it and may well be a robust stock with an ongoing “first-mover advantage” in digital secondhand.

My recommendation, if you’re a fan of the trend, pay close attention to ThredUp’s share price in the weeks following its debut. While the company may have compelling aspects, its growth rate likely doesn’t justify the nosebleed valuations of many recent IPOs.

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