Zip, Afterpay and Sezzle share prices: Coronavirus and valuation risk

Buy now, valuation later

Demonstrably, it’s much easier to hold high multiple stocks when economies are growing, people are spending, and no one is suggesting that some sort of economic catastrophe may be looming.

Though that last point may be an overstatement, the Coronavirus (COVID-19) situation has indeed exposed a raft of issues that investors previously had been happy to ignore.

Valuation looks to be chief among them.

Jimeet Modi – Founder and CEO of SAMCO Securities – makes the point that this virus-induced ‘market crash’ is actually a valuation play; the Coronavirus crisis is merely the scapegoat.

‘The frothy valuations needed the market to correct,’ says Mr Modi.

Conviction is another issue.

A recent Bloomberg article aptly pointed out that:

‘Investors have learned that the faith of their fellow investors is not as strong as they had thought. That raises the risk premium on holding stocks, and in turn causes share prices to fall more.’

The slighlty ominous conclusion of that article? Expect volatility to continue.

‘Given how much this pandemic is a truly new event, and that the process of trading itself generates information about the forecasts of other investors, price volatility can be expected to continue.’

Investing in loss making companies is indeed an enterprise that requires a degree of faith. The expectation after all – well, the hope we should say – is that the company will become profitable one day, and maybe even pay a dividend at some point.

Of course, as with all things in the markets, no such outcomes are guaranteed.

Afterpay, Zip and Sezzle share prices in focus

This all brings us to Australia’s buy now pay later sector; an area of the market where valuations have run particularly high in recent times.

Traditional valuation metrics don't matter so much, the thinking goes, because the growth prospects are so high. That thinking is currently being thoroughly tested by the market.

As we wrote in December:

‘By traditional metrics the likes of Afterpay and Zip do indeed trade on a lofty set of multiples.’

Further back still, in August we wrote that:

‘From a valuation perspective and on a price to sales basis, Afterpay currently trades at a heady multiple of 34.12, according to Bloomberg Data.’

Things have improved – in terms of the multiples on hand – though that has much more to do with the recent share price sell-down, opposed to a significant jump in fundamentals (though many BNPL stocks are seeing their fundamentals improve).

In the last month the Zip share price has collapsed over 50%, Afterpay has seen its stock plunge 28% and Sezzle's shares have dove 32%.

Even still, Afterpay continues to trade at a price to sales ratio of 18.62 (high by historical standards), while Zip trades significantly off that: at 5.16 times FY19 sales.

In saying all this, for bullish investors there is some good news. The recent equities sell down has seen the gap between broker price targets and share prices widen: on average, Afterpay’s price target stands at $37.82, Zip’s at $3.97 and Sezzle’s at $3.40 (though only one broker covers the stock); according to Bloomberg Data.

At the time of writing and at current price levels, those broker price targets imply returns of 34%, 123% and 172%, respectively.

Talk about upside potential!

How to trade the buy now pay later sector

Where do you stand: have the likes of Zip and Afterpay been oversold or is there still more room for further declines? Trade accordingly. For example, you can trade Afterpay shares – both LONG and SHORT – through IG’s world-class trading platform now.

To buy (long) or sell (short) Afterpay with CFDs, follow these simple steps:

• Create an IG Trading Account or log in to your existing account
• Enter ‘Afterpay’ or ‘APT in the search bar and select it
• Choose your position size
• Click on ‘buy’ or ‘sell’ in the deal ticket
• Confirm the trade