BNPL may have hit ceiling

afterpay Zip Openpay Splitit Sezzle NAB commonwealth bank Fidante stephen wood Eiger David Pace Greencape nikki thomas alphinity

14 September 2020
| By Chris Dastoor |
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The buy now, pay later (BNPL) space could be “too hot” as increased competition from PayPal and some of the big four banks may cut into the growth of stocks like Afterpay, Zip, Openpay, Splitit and Sezzle.

BNPL firms typically had a business model that allowed repayments in four instalments, with no interest or fees if paid on time.

Within the last week, both NAB and Commonwealth Bank had announced a zero interest credit card, however, both included a monthly fee.

PayPal had introduced a “Pay-in-4” repayment scheme, for purchases between $30-$600 with 0% interest from four months of the purchase.

BNPL equities had seen significant growth since the start of the year, but according to FE Analytics, Afterpay had lost 17.29%, followed by Splitit (-19.89%), Openpay (-27.31%), ZIP (-29.91) and Sezzle (-36.42%) since the start of the month to 10 September, 2020.

Speaking at the Fidante Partners webinar, Stephen Wood, Eiger principal and portfolio manager, said there was concern the BNPL space had become too popular and was unable to sustain its performance from earlier in the year.

“We are somewhat concerned this particular space has got too hot, particularly when we consider that it really does ultimately rely on retail to drive its business case forward,” Wood said.

“Retail has had some phenomenal stimulus hit it from Government plans… and it seems unlikely to us that some of the key retailers that BNPL helps are going to be able to cycle these numbers next year.

“Some of these business plans are being pulled forward and we’re quite relaxed about the high valuations, in other instances we would be somewhat concerned.”

David Pace, Greencape portfolio manager, said being an active manager had allowed them to avoid the stock, rather than pursuing it as it gets added to an index or following it for the sake of a trend.

“The inclusion or exclusion of any name into or out of an index has little bearing on what our portfolio looks like,” Pace said.

“That’s what the passive money reacts too, we think fundamentally and bottom up and we can’t find value in Afterpay.

“Now that it’s a larger index position, we see that as an opportunity to earn alpha by not owning it over the medium to long-term.”

Afterpay was held by several fund managers, including Aberdeen Standard Investments, Ausbil, Van Eck and Antares.

Nikki Thomas, Alphinity global portfolio manager, said it was better to not think about markets as a whole, but rather as a place to go looking for opportunities which is what an active manager does.

“In any market, there’s always a few stocks that look like they’re completely disconnected from fundamentals and we are seeing with the fuel of technology some business like that in the market today,” Thomas said.

“Are they all in the tech sector? Not necessarily, but they often have a tech piece to them and it probably is disconnected from the fundamentals.

“Interestingly, some of those are quite large-cap companies at the moment so there does appear potential for the index to be distorted and that is where you get passive money chasing big stocks in aggressive ways and creating a bigger disconnect.”

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