Is the current BNPL crisis boon for Goliath Afterpay as David suffers?

Summary

• ASX listed Afterpay shares have given a return of nearly 800%, amid hitting a low price of $8.9 on 23 March to close at $76.35 on 7 September.
• Afterpay delivered starry growth across its key operating metrics in recently released FY20 results ended 30 June, with its underlying sales increasing by 112% to $11.1 billion.
• The entry of US-based payments giant PayPal into the BNPL space with its pay in 4 products in the US, on 2 September led the share price of APT to fall by 7.4% between 2 September to 7 September.
• BNPL firms like Z1P and Sezzle share prices also fell after the announcement of a new offering by PayPal on 2 September, decreasing by 11.64% and 3.767%, respectively.
• However, Afterpay remains unconcerned of PayPal becoming an obstacle in its journey as it remains a more customised and dedicated platform.

While the country has been pushed into its first recession in the past 30 years, the BNPL sector has been booming, when majority of the other businesses are reeling under the pressure of COVID-19.

With a rapid increase in online purchases and consumers looking for more ways to save their money amid coronavirus, the attractiveness of BNPL firms has soared. The BNPL platform permits the consumers to get the product before completing the full payment, and the consumer is expected to make the full payment in instalments that are interest-free over a certain period of time. BNPL services are particularly becoming more popular amongst millennials, giving them quick access to credit, and allowing them to repay in interest-free instalments.

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Shares of many BNPL players, including high performers like Afterpay, Sezzle and Z1P, have been plummeting due to investor reactions to a new offering by PayPal. There have been rising concerns that the entry of PayPal in the market could belittle the plans of BNPL firms like Afterpay and Z1P who wants to expand in the US market and have also acquired US BNPL QuadPay recently.

Afterpay Limited (ASX: APT) share price has skyrocketed by 757%, from a low point of $8.9 on 23 March to $76.35 on 7 September.

On 8 September, Afterpay share price was at $75.04, declining by 1.716% from its last close.

PayPal’s strategic launch into the BNPL space

The Afterpay share price decreased 7.4% between $82.500 on 2 September to $76.35 on 7 September post the announcement of the entry of US payments giant PayPal into the BNPL sector was made.

The business of Afterpay follows the point of sale financing, i.e. making payment for buying products like TV, clothes, etc in 4 instalments instead of adding it on the credit card balance, which has been surging over the past 2 years, with the pandemic boosting the business to reach new levels. Now PayPal has stepped into this territory with its new Pay-in-4 product, a BNPL offering, which enables customers to pay for purchases in 4 interest-free instalments over 6 weeks period without any extra fee or upfront cash payment.

ALSO WATCH: PayPal Introduces BNPL Product: What Does it Mean for the Existing BNPL Players?

The newest offering of PayPal is for purchases between $30 and $600, and it will not charge customers with any interest or financial additions apart from fees for delayed payment. Further, merchants are also not obliged to pay extra fees to make the service available to customers.

PayPal has launched its Pay-in-4 service during the time when the world is crumbling under the pressure of coronavirus and people have gone into isolation to protect themselves from the deadly disease, which has also resulted in a surge in online shopping. Paypal’s new product could help the firm add more to its revenues as it will acter to the US consumer base, which is quite unwilling to use cash reserves or increase credit card debt.

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Paypal already posted record revenue figures of $7.24 billion and profits of $2.05 billion since the beginning of 2020 due to coronavirus induced increase in online sales. The share price of the Company has been burgeoning and adding $129 billion of the market value. The company is now worth more than Netflix, Walt Disney, and many US banks.

PayPal provides instalment solutions in Germany and France and Pay-After-delivery service in portions of Europe, Canada, and Australia.

Afterpay stays resilient and indifferent about competitors

Afterpay has overcome many hurdles and has grown to become a behemoth in the BNPL space, 6 months after COVID-19 grappled the world. Afterpay has been rapidly expanding its leading market position in the US, and the firm delivers substantial value to US retailers due to high customer retention and frequency than the local competitors.

Source: APT FY20 Result presentation, ASX

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On 27 August, Afterpay posted encouraging results for FY20 ended 30 June, and continued to show significant growth across its key markets.

Some of the highlights of Afterpay’s FY20 results include the following:

• Global underlying sales rose 112% to $11.1 billion in FY20 with its persistent penetration in the US and the UK markets
• Active customers more than doubled in FY20 to 9.9 million exceeding its target with the US and the UK customer base reaching 5.6 million and 1 million, respectively
• Net Transaction Loss (NTL) stood at 0.4% in FY20, in accordance with FY19 while Group Net Transaction Margin (NTM) was at $261.3 million, up 101% on FY19
• The combined liquidity and growth capacity of APT is of over $2 billion, which can fund in excess of $30 billion in annualised underlying sales above the current run-rate of over $15 billion

Source: APT FY20 Result presentation, ASX

Anthony Eisen, CEO of Afterpay, has stated that the product of PayPal was just providing a transaction solution when compared to APT’s sufficiently distinct platform. He also added that competition had been part of their journey, and it is not bound to alter Afterpay’s strategy or lower its global prospects.

Afterpay has also set out plans to expand BNPL services globally by exploiting on sector’s growing recognition, and also stated that the full-year loss had halved. The BNPL firm was also launched in Canada during August and has also taken steps to explore prospects in select markets including Singapore and Europe in FY21.