BNPL strong run on ASX & changing stance on stimulus: Are stocks done with the run-up?

  • Jul 14, 2020 AEST
  • Team Kalkine
BNPL strong run on ASX & changing stance on stimulus: Are stocks done with the run-up?

Summary

  • Lately, the buy now, pay later (BNPL) industry has skyrocketed as coronavirus pandemic made liquidity scarce and offline payment off-limit due to social distancing in place, driving an increase in contactless payments via online or apps.
  • Players like Afterpay, Splitit Payments, Openpay Group, or Zip have all performed exceptionally well in the last six months to date, with share prices up by more than 100%, driven by increased merchants on board and customers globally.
  • In Australia, stimulus packages have given purchasing power to customers, which also augmented the BNPL market significantly.
  • Australia’s stimulus packages would come to an end in September, however, with rising coronavirus cases, whether government would extend packages or not is yet to be seen.

Buy Now Pay Later (BNPL) companies have gained immensely by facilitating contactless payments, which eased the buying process amid the liquidity crunched economy maintaining social distancing to contain the virus. The pandemic has prompted customer to shift towards contactless, digital transactions and services, inducing business growth for BNPL players.

A buoyant stock market post March bear market has taken a growth trajectory that has also been reflected in BNPL stocks such as APT, Z1P, OPY, SPT and SZL.

FlexiGroup Limited (ASX:FXL) is the only exception which has seen a decline in the growing, market. Investors are embracing the players in their portfolio as their shares keep soaring high driven by increased merchants on board and customers globally.

Source: ASX

Source: ASX

Operating Model

The BNPL players operates by enabling customers to buy merchandise at BNPL registered merchants store (online or offline) through easy instalments without any interest. Sources of earnings include fees earned from merchants as a percentage of the purchase amount. Other source is the late fee obtained from customers upon late payments.

The model looks risky as customers may default leading to a bad debt. However, the ticket size of the credit is small, which reduces the risk of lending money to customers who would ideally not prefer to risk their credit score by defaulting on small amounts.

Triple digit growth recorded Since the March bear Market

BNPL firms such as Afterpay Limited (ASX:APT), Zip Co Limited (ASX:Z1P) and Splitit Payments Limited (ASX:SPT) are primarily fintech companies and have been riding high on the wave, with a considerable share price hike since last six months.

Investor’s favourite Afterpay has seen flamboyant growth in its share price since the March bear price of $8.90 on 23 March 2020 to $71.740 on 13 July 2020, a rise of 706.1%. The rise was backed by its increasing business growth nationally and internationally. The Company’s notification on the plan for $1 billion capital raise in July and announcement of the 4th quarter being the best performing period, with 9.9 million customers enrolled worldwide since inception have also bolstered the share price of the Company significantly.  

Like Afterpay, share prices of Splitit, Zip, and Sezzle have also experienced triple digit growth. On 13 July 2020, Splitit closed the trading session at a price of $1.695, giving a return of 726.8% since hitting March 19 low of $0.205. Zip last traded at $7.630, providing the return of by 626.7% between $1.050 recorded on 23 March, its 52-week low.

On the same day, Sezzle Inc (ASX:SZL) gave a  whopping return of 2,328.6% between July 1’s closed price $8.5 and $0.35 recorded on 23 March. Sezzle recently concluded the capital raising of $79.1 million through a fully underwritten institutional placement, priced at $5.30 per CHESS Depositary Interest. The Company would be using proceeds from the capital raise for boosting its growth strategy and bolstering its balance sheet.

Are government reforms leading to a fintech bubble in Australia?

Fintech shares are definitely on a roll led by the BNPL players. However, the BNPL players might fall flat when government reforms such as JobKeeper and JobSeeker stimulus packages are withdrawn in September. This could lead to an increased liquidity crunch resulting in less purchasing power for consumers.

With customers spending less, the underlying sales of the companies would suffer and consequently the revenues. Less liquidity in hand may also lead to increasing bad debt, though the operating model is considered less risky because of the less ticket size.

With coronavirus cases on rise in Victoria, especially in Melbourne, social distancing measures have been ramped up, affecting business activities majorly. The rising cases and rebrewing of further economic turmoil may prompt the government to not to withdraw the stimulus packages, but one never knows.

In March, Australian government announced stimulus package of $130bn known as JobKeeper Payment to provide businesses with $750 per week for each member of staff employed with them.

Fund managers are wary of the stimulus being ended that will impact the share prices of the companies significantly.  A fall in prices would also lead to a decreased value of their portfolio basket.

However, on an optimistic note, even if the economic turmoil does not end in short run, eventually the market would pick up once COVID-19 vaccines come out and a more stable living and business environment is projected.

 


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