BNPL fervour fizzles out
Sentiment around the ASX BNPL sector was riding high in 2020.
That year, Afterpay and rival Zip were notching share price records almost at will on the back of ballooning growth in the key US market.
In February 2021, BNPL fever peaked, and APT hit an all-time high of $160 a share.
But ongoing pandemic-related restrictions, general market uncertainty, and sector-specific cash flow issues poured cold water on the whole BNPL industry.
BNPL stocks began a slide still evident today.
Afterpay, the BNPL market leader, is down 15% year to date, underperforming the ASX 200 benchmark.
The underperformance arrested a stellar, years-long run by the fintech, with Afterpay gaining more than 3,300% since listing in 2016.
The same cannot be said for APT’s peers. Theirs has been a harder fall.
BNPL shares down as much as 96%
Not pulling any punches, The Guardian last week ran the following headline — ‘Shares in Australian listed buy-now-pay-later companies plummet by up to 96%’.
According to The Guardian’s report, shares in ASX BNPL stocks fell by an average of 80% compared to their peak prices in the last 12 months.
Payments analyst and chief executive of McLean Roche Consulting Grant Halverson laid out some stark figures:
‘The sector lost over $1.05bn in 2021 which has concerned many investors.
‘Most BNPL apps’ 2021 reports were bad, as sales growth declined, credit losses increased and cash burn increased, with a number seeming questionable in cashflow terms.’
Worsening matters, the Reserve Bank of Australia is now seriously considering changing payment rules to allow merchants to charge BNPL surcharge fees.
It’s a move that could make BNPL less attractive to credit cards for customers.
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BNPLs falling from their peaks
The best way to illustrate the current mood is to see how the major BNPL stocks are currently trading compared to their 52-week highs.
Take Afterpay first.
APT shares are down 37% from their 52-week high.
Z1P shares are down 65%.
Splitit Ltd [ASX:SPT] shares are down 83%.
Laybuy Holdings Ltd [ASX:LBY] is down 85%.
Sezzle Inc [ASX:SZL] shares are down 68%.
Openpay Group Ltd [ASX:OPY] shares are down 71%.
Growth versus cash: which is king?
The souring sentiment around BNPL stocks is resurrecting the hotly contested debate over valuations.
Computer technology and the internet have ushered in new businesses since the 2000s — businesses that traditional valuation methods find hard to analyse.
How do you apply traditional metrics to firms yet to make a profit but growing users and sales at incredible rates?
What is the intrinsic value of someone like Afterpay or Uber or Tesla?
A few years ago, Afterpay was the focal point of a broker war over valuation philosophy.
It was expertly covered in a recent book by Australian Financial Review journalists Jonathan Shapiro and James Eyers.
I highly recommend it for anyone interested in BNPL, Afterpay, and Australia’s corporate sector in general. The book is called Buy Now, Pay Later: The Extraordinary Story of Afterpay.
Now, the book frequently went over the heated disagreements between value-oriented and growth-oriented analysts over the outlook of Afterpay and its peers.
In the years prior to 2021, it looked like the growth minded analysts got it right. Value investors seemed out of touch.
Here’s a nice excerpt:
‘At stake was not only money, but a vision of how capitalism should work. Tesla and Afterpay were being rewarded by the share market for their potential to disrupt decades-old profitable corporations. Their sky-high share prices implied that they would inevitably succeed well before it was certain that they would.
‘But these runaway share prices were messing with the minds of a 150,000-strong global army of charted financial analysts, who had been trained to value companies based on their future cashflows.
‘In 2018, a formal education in finance, which involved sound bases to value companies, was a liability. An imagination was an asset. Value investors clung to that idea and hoped the world would turn in their favour.’
ASX BNPL: Is the world turning in value investors’ favour?
Is the protracted slide in BNPL shares a sign value-oriented analysts were right all along?
The pendulum has definitely swung in their favour.
But the biggest counterpoint is still Afterpay…and its valuation. Although it is well off its $160 peak, the company is still worth more than $30 billion, trading at $100 a share.
Old-school analysts were raising alarms when Afterpay was only worth $4 billion.
Of course, value analysts look vindicated when you consider the significant falls suffered by smaller BNPL stocks like LBY, SPT, and OPY.
But I think the debate over Afterpay is hindered somewhat by Square’s looming acquisition of the fintech.
Since Square is set to acquire Afterpay via an all-scrip offer, APT’s value is now closely pegged to Square’s…and less to its own fundamentals.
Interestingly, when Afterpay today cited a delay with regulatory approval for its Square takeover by the Bank of Spain, its shares fell 6% in afternoon trade.
Afterpay, the middle ground, and network effects
In 1999 Warren Buffett gave a speech at the Allen & Co gathering in Idaho.
The times — just before the dotcom bubble burst — were exuberant for tech stocks…not so much for ‘cheap’ and staid companies.
Shooting off a prescient warning, Buffett said:
‘The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company, and, above all, the durability of that advantage.
‘The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.’
It would have been interesting to see Afterpay’s share price performance this year had Square not made the takeover bid.
Would APT fall below $100 when excluding Square’s involvement?
In any case, maybe the valuation battle over Afterpay can come to a middle ground.
Maybe the value investors are right to worry about stretched valuations, financing problems, and escalating cash outflows.
Especially for BNPL stocks with fewer customers and merchants.
And maybe Afterpay — plagued by the fundamental issues raised by value investors — still has something other BNPL stocks don’t.
A first-mover advantage that compounded to a network effect.
Afterpay is now a verb in its sector.
It is one of the most recognisable brands in the BNPL space and the most recognisable in Australia.
RFi Group’s June 2021 survey, for instance, found that 90% of respondents were aware of AfterPay and 77% were aware of Zip.
LatitudePay was the next most recognised brand at 45%.
Can its dominant presence be considered a moat? And can that justify its lofty valuation?
It’s a question I think analysts will debate for years to come.
Now, if you are interested in fintechs and want to read more, I suggest reading through our latest fintech report for 2022.
It profiles three promising fintechs. Coincidentally, one of them is the only profitable BNPL stock in Australia.
For Money Morning
PS: Our publication Money Morning is a fantastic place to start on your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here