By David Boyle

Senior Equity Analyst
The Super Investor

8 am – September 4, 2020

The Outlook for BNPL

High growth, even higher valuations

In this review of the Australian listed Buy now, Pay later (BNPL) sector we take a look at the following stocks – Afterpay (APT), OpenPay (OPY), Splitit (SPT), Sezzle (SZL) and Zip Co (Z1P).

The BNPL sector was one of the most closely watched parts of the market during the August reporting season. It is the highest growth sub-sector in the ASX and has attracted substantial investor interest. Share prices have increased ten-fold across a number of the names since the March lows, although they have dropped back in the last week.

Further to our recent post-result reports on Afterpay and Zip, this report provides a broader sector overview.

The table below includes the key players, their size and products.

Note also that Flexigroup (FXL), soon to be renamed Humm, is refocussing its strategy away from traditional credit products to the BNPL space. This is still a small part of the company and the stock trades quite differently to the rest of the sector.

Transaction and customer growth soar

Within the BNPL sector, companies all reported an approximate doubling of transaction values – the dollar amount that merchants process using their platforms.

Customer growth was more mixed and relied in part on entries into new geographies. These statistics are highlighted in the table below:

Source: 2020 company reports

SZL presented the following chart using data from Worldpay, a global payments company. It shows forecast trends in consumer payment methods over the next few years. Digital wallets are expected to take an increasing share as credit cards continue to lose ground. BNPL is expected to almost double but will still account for only a tiny portion of the overall market.

Source: SZL 2020 company report, Worldpay

Repeat customer transactions were a feature of many of the BNPL company results, as they accumulate customer cohorts that have been on their platform for three or more years. Existing customers now make more than 80% of purchases, reducing the reliance on attracting new users.

Government support keeps lid on defaults

The sector was hit hard in the early stages of the COVID-19 pandemic for two main reasons. First, share prices were hit by a general bout of risk-off sentiment, especially given the BNPL sector had a lot of market cap and no earnings. Second, operators in this space typically wear the credit risk on consumer purchases, so if the customers stop paying, they are on the hook rather than the merchants.

However, heavy doses of government stimulus around the world prevented serious default events. There were no material rises in either defaults or delinquencies recorded by any of the operators. As Flexigroup showed in their presentation slide below, this was not just isolated to BNPL. Their traditional card business, and even their commercial business, did not take a hit as economies went into lockdown.

Source: FXL 2020 results presentation.

The risk was averted this time, but it has not disappeared altogether. Across the operators, those with short payment cycles (such as Afterpay and Sezzle) should have less risk than those with longer payment cycles (such as Zip or Splitit), or those with exposure to SME financing (Zip, Flexigroup, OpenPay).

The key is the US market

Increasing signs of success in the key US market has driven the sector in recent times. Whilst APT reported transaction growth of 52% in Australia over the year, for the US the growth was 330%. Z1P added $1 billion in market cap after announcing the acquisition of US-based QuadPay for $400 million.

Splitit and Sezzle both operate mainly in the US, with another hopeful, Zebit hoping to IPO this year. These companies are choosing ASX listings due to the success of the stocks that have already listed here. Our market apparently has a better “understanding” of the opportunity.

Growth tailwinds in the US have been very strong. The following chart from Afterpay shows how rapidly US consumers moved to online during the lockdown. Ten years of growth was achieved in just eight weeks.

Source: APT 2020 results presentation.

The US is far larger, and less penetrated than the Australian market. Investors here are hoping the growth trajectory will be similar in the US.

Competition heats up

There are enough names on the ASX alone to provide a competitive backdrop for the sector, even before considering well-funded offshore names such as Klarna, and the BNPL options offered by incumbent credit providers. But this week the biggest threat of all officially entered the market, PayPal.

The company is the most popular online payments processer, with around 300 million customers globally (almost half in the US) who transact on average 40 times per year. It processed over 12 billion payments in 2019.

The stocks in the sector sold off approximately 5-15% on the day of the announcement, and for very good reason. PayPal is a giant with a huge base of existing users it can convert. Its ‘Pay in 4’ instalment offering is in some ways a clone of other set-ups in the market, but it will reportedly differentiate itself by not charging any additional fees to the merchants or the customers. It will be easily available to all merchants that have PayPal as an option, with limited onboarding requirements.

The risk for all of the BNPL operators is that even if merchants continue to offer them as a payment method, merchants may preference PayPal due to the lower fees on offer, and consumers probably already have a PayPal account as well. This is potentially the largest threat to emerge for the sector in the last few years.


Across the board, valuations are extreme for all of the BNPL stocks when measured using traditional metrics.

With the exception of APT, which is expected to report a thin profit, all companies are still expected to report losses in 2022, so the EV/Sales metric often used to value early-stage companies is the only metric available. Afterpay stands out as the most expensive stock on this measure. Note that despite the recent pullback (% from high) all of the stocks have at least doubled this year and are multiple times above the March lows.

Current valuations imply that the very high growth rates achieved last year will be repeated for many years to come, despite the growing competition and possible default risks.


The sector had a great August reporting season, with massive increases in key customer and transaction metrics, and growing offshore expansion plans. But the potential impact of the entrance of PayPal as a direct competitor cannot be understated. Even if it doesn’t poach existing users to PayPal’s BNPL offering, the ease of implementation across a large existing user base could severely constrain new customer acquisitions for all other BNPL providers.

In this environment, Afterpay stands out as the quality offering in the sector due to its size, geographic spread, and the simplicity of its offering. It has been the least impacted stock in the last few days. But it also stands out as the most expensive stock in the group.

All of the stocks in this sector are priced for continued rampant growth over the coming years. Any disruption caused by a new competitor could throw this off course and send share prices tumbling. The market got a small taste of that this week.

Disclosure: The author does NOT hold shares in the companies in this report.

Neither The Super Investor nor the author has received [or will receive] any benefit whatsoever from any party at all for the publication of this article.

Disclaimer: This report is produced for the general information of investors without any regard for any individual person’s needs or objectives. Indeed, this content may not be appropriate for you. Reliance on the information or data is at your own risk. Be sure to seek specific advice from your personal adviser before taking any action.

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