Is there still value in the ‘buy now, pay later’ space?

Shares in ‘buy now, pay later’ providers have shot up in the past year but are investors too caught up in the hype?

Earlier this week, Lennox Capital Partners reported they had seen mixed results for these type of providers in their portfolio.

In the 12 months to 30 September, 2019, shares in Afterpay had risen by 106% while ZipCo had risen by 272%, according to FE Analytics.

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However, there are concerns about the regulation of the space and whether it could face more scrutiny in the future.

Dale Gillham, chief analyst at Wealth Within, said: “There is no doubt that this space has been heavily reported on in the media over the past two years with the news being positive for both investors and consumers alike. But have we really dissected this model to decide if it is in the best interests of consumers”.

He highlighted users were hit with high fees per individual order if they missed a payment which could end up costing them more than if they used an interest-free credit card.

“So is the party well and truly over for the companies in this space? In my view, the more these companies grow, the more attention they will attract from the regulators, such as ASIC [the Australian Securities and Investments Commission] and the ACCC [Australian Competition and Consumer Commission] , which will see the costs of compliance rise among many other things,” he said.

“While I think there is still value in this sector, I believe now is the time to acknowledge that every pot comes to the boil at some point in time and I believe the buy now pay later space is getting really close.”

Jonathan Wilson, smaller companies fund manager at Clime Capital, which held Afterpay in its Clime Smaller Companies fund, said it was “too early” to tell if Afterpay would be hit by regulation. The firm launched in Australia in 2015 and has since expanded into the US, where it is being supported by names such as Kim Kardashian's KKW Beauty, Sephora and Urban Outfitters.

“There is a very high pay-off for success and that is what we are seeing with Afterpay. They will have to invest heavily in the US but we think it is worth the investment,” Wilson said.

“It is too early to tell if there would be a regulatory issue with buy now, pay later providers.”

Share price performance of ZipCo and AfterPay over one year to 30 September, 2019.

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