A strange price wave is flowing through the fintech sector this week, causing some beloved ‘buy now, pay later’ (BNPL) gems to experience interesting dips and surges in their share price.
The up-and-coming small-cap contender Splitit Ltd [ASX:SPT] has added 34 cents to their price this week — a 56% gain — after announcing a bunch of new partnerships to boost North American operations.
Zip Co is down 4.23% at time of writing, sitting at $5.20 after UBS issued a ‘sell’ recommendation at a $4.80 price target.
And Afterpay, the BNPL leader, is down a whopping 7.9% to $33.66 at time of writing, hit by UBS’ ‘sell’ recommendation with a price target of just $17.25.
UBS say Afterpay is priced too high
According to UBS (as reported by The Sydney Morning Herald), their justification for Afterpay’s low price target is that at the current share price, ‘gross merchandise value needs to grow to about $175 billion by 2029-30.’
‘This could require about 47 million customers, or a combined 18 per cent/ 12.5 per cent/12.5 per cent of the Australia/US/UK adult populations collectively spending about $3,800 per year (more than double ANZ per customer spend in 2018-19).’
Using figures from their FY19 presentation, Afterpay currently have 4.6 million active customers — less than 10% of UBS’ estimated necessary figure.
The analysts also noted that:
‘Less growth is priced in for Zip than for Afterpay…given Zip’s smaller customer base (1.3 million) and underlying sales today.’
Thus, it’s an issue of growth that is dampening UBS’ outlook on these stocks. And this is interesting, given Zip Co is up almost 400% year-on-year, and Afterpay is up 145% year-on-year.
Really, the ‘sell’ recommendations come down to UBS analysts not believing in the future growth potential of fintechs in general.
The future for BNPL
UBS analysts believe the BNPL sector may need to undergo further regulation if it is deemed to be a credit service.
Currently, 64% of BNPL users are of this mindset, and if it ends up being the case, the outcome will need to be priced into fintech share prices.
They’re also concerned that BNPL users are mostly younger, wealthier, employed, but more indebted people. The note stated:
‘In our view, this could suggest either 1) that BNPL services are filtering out potential customers who are on lower incomes or not in full time employment of 2) if existing consumers are early adopters, credit quality could fall if BNPL becomes more mass-market.’
This sentiment was somewhat echoed in Mozo’s BNPL 2019 report, as Director Kirsty Lamont commented:
‘Buy Now Pay Later has changed the face of the way we pay for goods with more than 25% of users cancelling their credit card and a further 23% saying they no longer use it.
‘The pitfall is that it’s incredibly easy to bite off more than you can chew, and miss a payment.’
Yet according to the report, 87.3% of the surveyed BNPL users say they have their spending under control.
Moreover, in Afterpay’s FY19 presentation, it was noted that over 95% of their transactions incur no late fees.
They also facilitate responsible spending through ‘inbuilt consumer protections including low spending limits, caps on late fees, [and] individually approved transactions.’
To conclude, while there’s merit in the concerns about the BNPL sector, they do appear to grow more likely through a long-term outlook.
As for right now, there seems to be plenty of growth opportunity for fintechs, and they are proving to be catching some of it.
It’s still a sector to keep an eye on.
Imogen van der Meer,
For Money Morning