Afterpay, Zip share prices continue to fall, competition concerns intensify

We examine some of the factors that have potentially contributed to the sell-off in buy now pay later stocks over the last week.

US tech weighs on Australian equities

Global equities have sold-off heavily in the last couple of weeks – with the Nasdaq 100 leading these declines.

Though exhibiting short-term weakness, it should be noted that US tech has outperformed year-to-date, with the Nasdaq 100 up ~25% – even when factoring in this recent retreat. By comparison, the S&P 500 is up just 2.5%, while the ASX 200 has significantly underperformed its US counterparts – down over 10% since January.

Afterpay, Zip, Sezzle, Openpay share prices in focus

The Australian market’s proclivity to follow the US market’s lead has been well demonstrated in recent times – with ASX-listed buy now pay later (BNPL) stocks running-up significantly since January.

YTD, Afterpay has risen 146%, Zip has gained 91%, Sezzle has soared 294% and Openpay has added 153%.

While many theorised that BNPL stocks would face rising bad debts or potentially stagnated growth as a result of the coronavirus pandemic – mostly the opposite has proven true – growth remains heady and bad debts, for now, seemingly remain under control.

Though up YTD, these ‘tech’ stocks – driven by general market weakness and/or concerns about elevated valuations – have all come off over the last five sessions.

Between 4 September and 10 September Afterpay has dropped 3.29%, Zip has shed 5.03%, Sezzle has crashed 13.51%, Openpay has dove 8.72% and LayBuy, which listed just last week, has fallen 12.20% in that period.

The ASX-listed BNPL cohort continued to fall on Friday, 11 September.

UBS: PayPal’s BNPL move potentially represents a ‘significant turning point’

Beyond general market weakness weighing on global equities and tech stocks in particular, mounting concerns over competition may have potentially spooked BNPL investors.

Though not new news – with PayPal entering the BNPL/ instalments space through the pending launch of its Pay in 4 offering – more analysts, in recent times, have begun releasing research on the potential implications of this development.

UBS – who have long highlighted increased regulation and competition as two key risks to the burgeoning sector – note that PayPal’s entry into the space is likely to prove challenging for Zip, Afterpay and other BNPL companies.

Underscoring the weight that PayPal wields on a global scale – UBS flagged that not only does the payments giant boast more active users, merchants, and a lower cost offering than APT, but it is significantly better capitalised, with a AUD$2.0 billion marketing budget (FY19) and billions in annual free cash flow.

‘This magnitude,’ noted UBS analysts ‘highlights the challenge APT and Zip now face to win the long tail of smaller merchants as well as larger merchants not yet on their platforms, given PayPal's offering is significantly cheaper and requires no additional integration.’

‘We believe this is likely to result in margin compression across the sector if growth continues,’ the investment bank concluded.

UBS has Sell ratings on both Afterpay and Zip.

What are your thoughts on the BNPL sector…

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