Sezzle's Strong Q3 2025 Results Mask Deepening Credit and Fee Dependence Risks

What happened

Sezzle reported robust Q3 2025 performance with revenue nearly tripling year-over-year to $116.8 million, gross merchandise volume up 59%, and management raising FY26 adjusted net income guidance to $4.35 per share, as highlighted in a Seeking Alpha article. However, the DeepValue master report reveals that this growth is increasingly driven by rising provision for credit losses, which reached 27.5% of revenue in Q3, and consumer fees such as late fees surging 369-522% year-over-year in early 2025. The report notes that Sezzle's model is 'highly cash-consumptive,' reliant on revolving credit and aggressive underwriting to sustain high growth, while merchant attrition and platform dependence on Shopify pose additional threats. Despite the positive headlines, Sezzle trades at elevated multiples of 27x trailing EPS and 33x EV/EBITDA, embedding optimistic assumptions of 60%+ revenue growth and low-30s EBITDA margins that leave little margin of safety. The DeepValue report rates Sezzle as a 'POTENTIAL SELL' due to these risks, with early stress signals including regulatory scrutiny and volatile stock performance suggesting heightened downside potential.

Implication

Sezzle's strong Q3 results and raised guidance may attract momentum buyers, but the underlying reliance on delinquency fees and growth-focused underwriting increases vulnerability to regulatory caps or economic downturns, which could erode margins. Current valuations assume sustained high growth and profitability, yet any deviation—such as credit losses exceeding the 2.75% of GMV target or fee restrictions—could quickly compress multiples toward the bear case value of $55. Management's $100 million buyback authorization, executed without clear leverage guardrails, risks misallocating capital if credit conditions deteriorate, potentially weakening the balance sheet. Investors must closely monitor quarterly credit metrics, fee trends, and regulatory developments, as these factors will determine whether Sezzle can maintain its premium valuation. Given the asymmetric risk-reward profile, trimming or avoiding positions at current levels is prudent, with re-entry considered only after a price reset below $60 or evidence of durable, fee-light growth.

Thesis delta

The new article reinforces the growth narrative, but the DeepValue report indicates no material shift in the investment thesis; Sezzle remains overvalued with elevated risks from credit dependence and regulatory uncertainty. However, if management successfully scales subscription revenue and maintains credit discipline within guided ranges, there could be upside, though current data suggests increased vigilance is required. The thesis would only change if Sezzle demonstrates sustainable, fee-diversified growth with stable credit metrics, which is not yet evident from the filings or recent performance.