Sezzle's S&P SmallCap 600 Inclusion Offers Liquidity Boost, But Core Risks and High Valuation Persist

What happened

Sezzle Inc. is set to join the S&P SmallCap 600, a move that typically increases index fund buying and enhances stock liquidity. The DeepValue report notes Sezzle's solid execution, with GMV growing ~39% in 2024 and profitability turning positive, driven by subscription expansions and a capital-light model. However, the stock remains fully valued at ~27x P/E and ~8x P/S, with key risks like seasonal credit loss volatility, regulatory scrutiny, and competitive pressures unchanged. This inclusion may temporarily boost investor sentiment and reduce volatility, but it does not address underlying fundamentals such as reliance on revolving credit and limited disclosure on leverage. Investors should critically view this as a surface-level positive that doesn't alter the operational challenges or justify a valuation premium.

Implication

Index inclusion often triggers passive fund inflows, potentially lifting Sezzle's stock price in the near term due to increased demand. Yet, this event doesn't mitigate the DeepValue report's concerns: high P/E and P/S ratios suggest the stock is already pricing in growth, while risks like seasonal charge-offs and regulatory uncertainties remain. Investors should be wary of over-optimism, as such inclusions can distract from ongoing issues such as limited interest coverage and competitive threats from BNPL peers. The report's watch items—credit performance, subscription traction, and funding liquidity—are still critical for assessing long-term viability. Therefore, while inclusion adds a liquidity catalyst, it reinforces the need for disciplined monitoring before any investment upgrade.

Thesis delta

The S&P SmallCap 600 inclusion introduces a new liquidity factor that could enhance stock stability and attract institutional interest. However, it does not shift the core thesis, as Sezzle's valuation remains rich and operational risks—like credit seasonality and regulatory exposure—are unchanged. A significant thesis upgrade would still require improvements in credit metrics, subscription growth, or regulatory clarity, not just index-related momentum.