Poshmark Is Producing Huge Free Cash Flow, Giving It a Much Higher Value

Stock Market

Poshmark (NASDAQ:POSH), the new and second-hand clothing online store, produced excellent earnings for its second quarter ending June 30 on Aug. 10. With that in mind, here is the bottom line: POSH stock is worth at least 55% more at $41.20, compared to its price as of Aug. 21 of $26.53.

Source: NYC Russ / Shutterstock.com

You wouldn’t know this from the way the stock has performed lately. Short sellers have been attacking it, and now hold a 21.6% stake in its float, according to Yahoo! Finance. 

The stock has dropped from its high of $104.98 shortly after it went public on Jan. 14 and recently hit a low of $25.62. As of Aug. 20, POSH stock was at $26.53. So is the stock is at a trough? I think so since my target price is $41.20.

What Poshmark Is Worth

Overall, the reason I believe this is because the company is now clearly producing large amounts of free cash flow (FCF). In Q2, its sales were up 22% year-over-year (YoY) to $81.8 million. The company’s “take rate” was high at 18.2% since its Gross Merchandise Value (GMV), the total of all transactions, was $449.6 million.

This take rate was even higher than the take rate at Etsy (NASDAQ:ETSY), which I recently wrote about. Their take rate is lower at 17.4% and their price-sales (P/S) multiple for 2022 is 9.28 times vs. 5.10 times for Poshmark. So clearly, POSH stock is worth more than its present price. But how much more?

One way to do this is to estimate its FCF going forward and then set a value on that. For example, for the six months ending June 30, Poshmark reported that its operating cash flow was $25.14 million. After deducting $849K in capex spending, the FCF for the six months was $24.291 million. Since Poshmark’s six months’ sales were $162.713 million, its FCF margin was 14.93%. Let’s call it 15% for forecasting purposes.

Next, if we apply the 15% FCF margin to the company’s 2022 forecast sales of $418.9 million, we can predict that FCF will hit $62.84 million in 2022. We can use this to value POSH stock.

For example, if the market gives it a 2% FCF yield, the market value would be $3.141 billion (i.e., $62.84 million/0.02=$3.14 billion). This is 53.4% higher than its $2.047 billion market value right now, as measured by Yahoo! Finance.

In other words, expect POSH stock to rise to $41.20 once the market values its FCF properly at a 2% yield. That is the same as valuing FCF at a market value of 50 times. (i.e., 1/0.02 = 50).

Where This Leaves Poshmark

Moreover, Poshmark’s growth and its take rate are very impressive. That is why I think its underlying inherent value is at least 55% higher, as shown in my analysis above. But the truth is that the stock is also weighted down by comparison with Ebay (NASDAQ:EBAY).

For example, eBay has a market value of $47.35 billion, but its 2022 forecast sales are $11 billion. That means that its P/S metric is just 4.3 times. This is slightly lower than Poshmark’s 5.1 ratio, even though I argued that POSH stock deserves to have a higher P/S value.

But let’s look closer. eBay reported that its Q2 GMV was $22.1 billion, and it produced sales of $2.7 billion from that GMV. Therefore, its take rate was just 12.2%, vs. the much higher Poshmark take rate of 18.2% (see above). So clearly, Poshmark has a much more profitable (about 50% more) business model — as long as it can produce free cash flow margins that are high from this high take rate.

In turn, this is why I still think that POSH stock will eventually have a higher price than right now. The market will realize over time that its business model is more profitable in the long run than eBay’s.

What To Do With POSH Stock

Now that the stock is at a trough, it is probably a good time to begin averaging into it even if it keeps on falling. After all, the stock trades for just 5.1 times sales and has a very profitable FCF margin. Over time, the market will revalue it at least 55% to $41.20 per share.

It could take to the end of 2022 for this to happen (i.e., over 1.33 years from now). The average annual compounded return will be 39.1% per year on a compound average growth rate (CAGR) basis.

On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.

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