It has not been a great time in the buy-now, pay-later (BNPL) sector over the last six months, as concerns mounted over the effect of the influx of larger players (such as PayPal and Apple) into the market, intensifying already keen competition, and more recently, long-expected ramping-up of regulatory pressures.
A decision last month from the Reserve Bank of Australia (RBA) was widely seen as stripping the fast-growing sector of one of its main advantages, by banning the “no surcharge” approach of the BNPL players, who could stop retailers from passing on the cost of allowing their customers to use the payment method.
The BNPL operators had not allowed retailers to add a surcharge to customer purchases made using BNPL, to compensate for their merchant fees, which are much higher than the surcharge fees on credit cards (about four times higher) and debit cards (about eight times higher).
The RBA has now called for the BNPL players to remove rules in their contracts with merchants that prevent the costs of the services from being passed on to customers – but this is not an instant change to the playing field, because the government will need to amend the payment law to give the RBA the power to impose the changes.
This would be expected to cut into revenue for the BNPL players.
Hence the concerns – especially from long-time BNPL sceptic UBS – that other regulators around the world will emulate the RBA, and crimp industry fee income.
But essentially, the BNPL market is still all about the global growth opportunity.
According to data from fintech giant FIS Worldpay, e-commerce transactions around the world were $US4.6 trillion ($6.3 trillion) in total, of which BNPL accounted for 2.1%. FIS Worldpay forecasts that global penetration to double by 2024, to 4.2%.
Afterpay’s acquirer, US payments giant Square, Inc., agrees that the penetration rate of BNPL is currently about 2%, but it estimates the global payments opportunity at $US10 trillion ($13.7 trillion).
Clearly, there is a very big runway for growth.
The growth is coming because younger consumers – Millennial and Gen Z – are driving the switch to BNPL platforms, and these cohorts’ peak earning years are still to come. The BNPL model is built on how consumers use the service more over time. For example, this has driven recurring revenue and strong returns on investment for Afterpay: in the first year, customers tend to use the platform 3.9 times, on average. By the time the cohorts have been on the platform for more than two years, they are using it 15.7 times a year. Afterpay’s early Australia and New Zealand customer cohorts, who’ve been on the platform for more than four years, are transacting about 31 times a year. The customer lifetime value (how much a single customer is worth to the business) expands all the time.
The other main point to keep in mind is that BNPL is more about the retailers. They love it because it helps them convert more sales, expand the basket size of purchases, and drastically cut the rate of returned purchases. BNPL is best seen as a payments partnership with the retailers, not solely as a means for millennials to buy stuff more easily.
Looking at Afterpay, for example, active customers doubled in FY21 to more than 2.1 million, but the total number of active merchants grew by 500%.
The price falls of the BNPL players since roughly February have been large, in the order of:
- Afterpay (APT) – down 26.5%
- Zip Co (Z1P) – down 57.5%
- Sezzle (SZL) – down 61.7%
- Splitit (SPT) – down 77.4%
- Openpay (OPY) – down 63.5%
- Laybuy (LBY) – down 69.4%
- Humm (HUM) – down 38.3%
- Payright (PYR) – down 75.2%
That is alarming for investors. But what’s even more confusing is if investors try to use analysts’ consensus price targets, figuring that, because the unprofitable BNPLs are very hard to value, and the metrics are confusing, “I’ll rely on the professional analysts”.
If you do this, the implied price growth seems too good to be true, as the following targets attest:
- APT implied growth: 27%
- Z1P implied growth: 24%
- SZL implied growth: 123%
- SPT implied growth: 3.8 times
- OPY implied growth: 2.6 times
- LBY implied growth: 162%
- HUM implied growth: 45%
The caveat here is that in some cases, “consensus” means one analyst and a report that has not been updated for a few months.
I think the two major players, Afterpay and Zip Co, look like good buying at these levels – and that a couple of the smaller operators also have appealing dimensions.
1. Afterpay (APT, $115.10)
Market capitalisation: $33.4 billion
Three-year total return: 104.3% a year
Analysts’ consensus valuation: $146.33 (Thomson Reuters), $141.68 (FN Arena)
The news in August of Square’s $39 billion scrip bid by Afterpay sparked plenty of attention for the BNPL space. Earlier this month, Square shareholders approved the plan to issue stock to buy Afterpay; the Australian firm’s shareholders will vote later this year. But the deal is now expected to be completed in the first quarter of 2022.
The Square and Afterpay combination is going to be a giant, valued at well over $160 billion. The growth of the merged entity could potentially be massive.
For every one Afterpay share an investor owns, they will receive 0.375 shares of Square. When the bid was announced, Square shares were worth $US247.26, implying a transaction price of $126.21 per Afterpay share. Afterpay effectively has a fixed value, of 0.375 times the value of Square’s shares. On US analysts’ consensus 12-month price targets for Square, of $US308, at current exchange rates, APT should be worth about $157.40.
2. Zip Co (Z1P, $5.96)
Market capitalisation: $3.4 billion
12-month total return: –1%
Three-year total return: 82.8% a year
Analysts’ consensus valuation: $7.42 (Thomson Reuters), $7.31 (FN Arena)
Yes, differing opinions is what makes a market, but Zip Co sparks very divergent opinions. Everyone is looking at the same market, the same numbers – but Ord Minnett has a price target on Zip of $9.50, while (BNPL sceptic) UBS has a price target on Zip of $5.40, and says “sell.”
If Ord Minnett’s thesis holds out, Z1P appreciates 60% from its current price.
Macquarie also thinks Z1P has further to fall, with a price target of $5.70, but Morgans is looking for $8.56, and even Citi, with a “neutral” recommendation, has a price target of $7.40.
The Stock Doctor (Thomson Reuters) consensus target – which implies 24.5% upside from here – is collated from 11 analysts’ recommendations.
Like Afterpay, it wouldn’t be good news for Zip Co if Australian consumers are suddenly slugged 4% or more to use the service – but again, the growth opportunity is what investors should be looking at.
Zip’s global strategy is slightly different to Afterpay’s – Zip is targeting emerging markets, where the demographics of younger consumers dominate and there is a demonstrable predilection to use technology to bypass more traditional channels into the financial services market. In September, Zip struck a deal to enter the Indian market by spending $US50 million ($69 million) to buy a minority stake in BNPL company ZestMoney. At the time, ZestMoney was quoted as saying that it believed India would emerge as the largest BNPL market in the world over the next five years.
3. Laybuy Group (LBY, 44 cents)
Market capitalisation: $112 million
12-month total return: –68.6%
Analysts’ consensus valuation: $1.146 (Thomson Reuters, two analysts)
New-Zealand based BNPL provider Laybuy is different to Afterpay and Zip Co in that its main focus is the United Kingdom, which the company says has an addressable retail market of £394 billion ($740.7 billion), about 2.2 times the size of the Australian market in terms of overall spending. And the UK is also a market where BNPL is still in its infancy, at about 1.7% of retail spending (6% of online retail spending): this is expected to grow quickly. Laybuy’s payment platform enables customers to split the payment of purchases (whether online or instore) across six, weekly interest-free instalments, the first being at the point of sale.
(Laybuy’s other main differentiation is that it is currently the only BNPL provider to conduct hard credit checks.)
The June quarter was very robust for Laybuy, with gross merchant volume (GMV), or the total value of merchandise sold using the platform, achieving a record high of $NZ206 million, which annualises to $NZ825 million. This growth was powered by the UK operations, where it recorded a 332% increase in active merchants and a 90% increase in active customers. In total, active customers grew by 57% in annualised terms, to 890,000 this quarter, while active merchants grew by 86% YoY. Laybuy looks to be firmly on track to reach its target $NZ1 billion in GMV for FY22.
I would not be literally expecting to see the target price cited, but 44 cents looks to be decent value for Laybuy.
4. Openpay Group (OPY, $1.24)
Market capitalisation: $162 million
12-month total return: –54.2%
Three-year total return: n/a
Analysts’ consensus valuation: $3.15 (Thomson Reuters, two analysts)
Openpay also has a differentiating factor in the BNPL market, in that it takes the interest-free BNPL model and focuses on industries such as automotive, healthcare, home improvement, club and organisation memberships and education. Because of this, its purchase sizes can be much larger than other BNPL providers: it provides options for payments between $50 and $20,000, with payments over periods from two to 24 months. The flipside of this is that Openpay says its market sectors are less competitive than retail – and it also targets customers from older demographics.
In October, Openpay launched its OpyPay product in the US market, rolling it out with launch partner ezyVet, which gives it access to 1,200 veterinary clinics and hospitals in the US. The US specialty veterinary market has high transaction values for procedures such as MRIs, CT scans, and reconstructive surgery.
Openpay plans to parlay this veterinary pilot into expansion in healthcare, dental, auto repair, education, home improvement, and big-ticket retail. The company’s pitch is that OpyPay is the first product of its kind in the US market, which holds massive demand for flexible instalment plans to enable better budgeting, smarter payments, and increased merchant revenues. Because it provides consumers with a flat-fee product with predictable payments designed for larger purchases over longer terms, Openpay thinks it’s on a winner in the US with OpyPay.
The company cites market research that shows US consumer demand for instalment payments continuing to rise “meteorically,” with transaction volumes expected to exceed $US100 billion ($137 billion) in 2021. OPY says that in the US, 111 million consumers say they would prefer to make high-value purchases using a BNPL service, rather than using personal loans or credit cards. That is its strong point – a genuine niche area of BNPL.
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