Top 7 BNPL stocks on the ASX in 2020

With the share prices of many companies in the Buy Now Pay Later (BNPL) sector proving volatile in recent times, in the following article we examine:

• What is BNPL (Buy Now Pay Later)?
• How does BNPL work?
• Top 7 BNPL ASX Stocks
• How to trade BNPL stocks

What is BNPL (Buy Now Pay Later)?

Buy Now Pay Later (BNPL) is a relatively new, instalments-based payments method, typically used to make discretionary purchases – both in-store and online.

Typically, companies in the sector, such as Afterpay or Sezzle do not charge customer’s interest on their BNPL purchases, but rather charge late fees should a customer fail to make a pre-arranged instalment payment. This customer-centric approach to business – as well as a number of other factors – has seen the sector grow rapidly in recent years, as more traditional forms of credit, such as credit cards, have progressively fallen out of favour.

In addition to that, many have argued that the coronavirus pandemic – which has seen the adoption of e-commerce accelerate on a global scale – has proven to be a key tailwind for the sector. Such an argument looks well reflected in the recent results of many BNPL companies.

How does BNPL work?

As a point of sale (POS) financing option, BNPL products have grown increasingly popular in recent times. But how exactly do they work?

Using Afterpay as a basic example:

A prospective customer wants to make a purchase online. They find an item they adore. They go to checkout. They select Afterpay as their preferred payment method. The customer places the order.

Firstly, in many cases Afterpay will require its users to make a 25% up-front payment for product, in-line with the company’s emphasis on responsible spending.

Following that, the remaining balance from the online purchase will be split into four even instalments, withdrawn from a customer’s linked account automatically every two weeks. That is, they’ll pay it in 4. Customers have the option of making additional payments as a means of paying down their Afterpay balance quicker.

Turning to the other side of this equation: Afterpay has displaced the risk that would otherwise be bore by the merchant. When the customer places the order, Afterpay pays the value of the customer’s purchase to the merchant, while the merchant pays a fee to Afterpay for facilitating the purchase – expressed in part through a BNPL company’s net transaction margin (NTM) – typically represented as a percentage of underlying sales.

Why would a merchant do this?

One, and as noted above, it removes the credit risk for the merchant: with a merchant paid in-full and immediately. If the customer is unable to make a payment on the purchase made, this issue has been deferred to Afterpay.

Two, the potential to see an increase in the goods purchased, that is a ‘basket size’ increase. According to research from Klarna – a privately held, Swedish BNPL company and bank – it was reported that e-commerce stores have in some cases seen their basket size increase by up to 68% by allowing the use of BNPL as a payment option.

Three, access to a bigger more diverse customer-base. With Afterpay and Zip alone boasting more than 10 million active customers – and with many of those customers increasing their transaction averages with the platform overtime, the appeal of having increased visibility on a BNPL platform is intuitive.

Ultimately, all of this reinforces a two-sided network effect that has seen BNPL companies such as Afterpay grow so rapidly.

‘For two-sided marketplaces such as Airbnb, eBay, and others, the organic share of new users grows as more suppliers (housing, sellers) and buyers want to join the network to get access — because of the potential revenue and variety of choice there,’ Li Jin and D’Arcy Coolican, from Andreessen Horowitz argued.

Top 7 BNPL ASX Stocks to Watch in 2020

With the above considered, below we look at the top BNPL stocks listed on the Australian stock exchange (ASX) – ranked in terms of market capitalisation. Beyond that, we also examine how these companies have performed year-to-date – from both an operational and share price perspective.

1. Afterpay (APT)
2. Zip (Z1P)
3. Sezzle (SZL)
4. Splitit (SPT)
5. FlexiGroup (FXL)
6. Openpay (OPY)
7. LayBuy (LBY)

_{*Statistics correct as of the market close on 15 September.}

Afterpay share price: +144% YTD

Arguably the leading player in the BNPL space, Afterpay has seen both its operational metrics and share price surge in 2020 – as the sector benefits from an accelerated shift to e-commerce as a result of the coronavirus pandemic.

For FY20, Afterpay reported:

• Underlying sales (transaction volumes) of $11.1 billion, up 112%
• Revenues of $519.2 million, up 97%
• 9.9 million active users and 55.4 thousand active merchants
• Earnings (EBITDA) of $44.4 million, up 73%
• A net transaction margin of 2.3%

Commenting on those full-year results, Afterpay’s Chair said:

'Our performance throughout FY20 demonstrates the power of our differentiated model and our ability to adapt despite adversity in economic and social conditions.'

Read our deep-dive into How to Buy, Sell and Short Afterpay here.

Zip share price: +71% YTD

2020 has proven to be a ‘game changing’ year for Zip – with the company recently announcing strong growth over the fiscal year and that it had acquired the US-based QuadPay. As a combined entity, Zip-QuadPay will boast annualised transaction volumes of $3.0 billion, annualised revenues of around $250 million, and an up-sized customer-base of 3.5 million.

Beyond that significant acquisition announcement, for FY20 Zip reported:

• Transaction volumes of $2.1 billion, up 87%

• Revenues of $161.0 million, up 91%
• 2.1 million active customers and ~24.5 thousand partnerships
• Cash earnings (EBITDA) of $3.5 million

Speaking of those results, Zip’s Managing Director and Chief Executive Officer, Larry Diamond said:

'2020 has been another monumental year for Zip as we delivered a record set of financial results, whilst navigating the unprecedented impacts of COVID and transforming the business with a number of game-changing products and business acquisitions.’

Sezzle share price: +302% YTD

The Sezzle share price has been one of the best performers of the BNPL cohort year-to-date – with the company recording near-exponential growth across all of its key operational metrics.

Indeed, for the six months ending 30 June, Sezzle reported:

• Underlying merchant sales (transaction volumes) of $445.2 million, up 338%
• Total income (revenue) of $30.1 million, up 384%
• 1,475,235 active customers and 16.1 thousand active merchants
• A net transaction margin of 1.7%

Speaking of these impressive results, Sezzle’s CEO, Charlie Youakim said:

'We are fortunate to be able to provide merchants and consumers the payment flexibility they need in this unprecedented global pandemic of our lifetime. The utility of Sezzle is evident in our record 1H20 performance.’

Sezzle, like Afterpay, places a strong emphasis on fashion-centric purchases while also stressing that BNPL can be a force for positive change in the lives of its customers.

Splitit share price: +119% YTD

Splitit differs somewhat from a number of the BNPL companies discussed thus far in that its customers can use their existing debit card to split their payments over a number of instalments, which according to the company: ‘keeps their payments small so they keep more of their money for living’. These purchases, the company goes on to say, can be divided into ‘fee or interest-free monthly installments, without the need for registration, application or approval.’

For the half ending 30 June, Splitit reported:

• Merchant Sales Volume (MSV or transaction volumes) of US$89.1 million, up 133%
• Gross revenues of US$3.1 million, up 244%
• An operating loss of US$9.0 million
• Over 1 thousand total merchants and 309 thousand total shoppers in H1 FY20

'Splitit's value proposition for merchants and consumers have proved to be more relevant now than ever. This, coupled with strong execution of our high-growth strategy, has helped us deliver record [volume growth] and revenue in the half year,' said Splitit's CEO, Brad Paterson, of the H1 results.

Flexigroup share price: -40% YTD

Speaking to how significant of an opportunity companies believe the BNPL sector is – as part of FlexiGroup’s FY20 report the company announced a strategic rebranding from Flexigroup to Humm – the company's flagship BNPL offering.

This move, said the company, will 'simplify our story to our customers and retailers, and clarify our significant market position as a leading BNPL player and provider of long term interest free solutions.'

Though this re-branding has yet to be finalised, in FY20 the company reported:

• Transaction volumes of $2.5 billion, up 17%
• 2.3 million active customers, up 30%
• 73 thousand retail and commercial partners, up 13%
• A statutory net profit after tax (NPAT) of $21.4 million

Openpay share price: +142% YTD

Like Splitit – Openpay’s BNPL offering diverges somewhat from the likes of Sezzle and Afterpay. Indeed, unlike those companies, which target lower value, discretionary transactions, Openpay offers its users BNPL ‘plans’, which span anywhere ‘from between 2 and 24 months in duration, and of values between $50 and $20,000.’

Moreover, in its prospectus, Openpay noted that it was targeting a substantially older audience, which the company considers to be more financially savvy and therefore lower risk.

Despite those points of difference, in FY20 Openpay reported:

• Total transaction values (TTV) of $192.8 million, up 98%
• Revenue of $18.0 million, up 64%
• An earnings (EBITDA) loss of $30.1 million
• 109 thousand active customers and 2,162 active merchants
• A net transaction margin of 2.5%

LayBuy share price: -23% YTD

LayBuy represents one of the newest BNPL companies to list in Australia, launching its initial public offering in September. While the share price has proven volatile since the IPO, like the other companies discussed, LayBuy has seen strong growth across its key metrics in recent times, boosted by growing popularity of the sector.

Underscoring this popularity, for FY20, LayBuy reported:

• Gross merchant volumes (transaction volumes) of NZ$226 million, up from NZ$126 million in FY19
• Revenues of NZ$13.7 million
• 473 thousand active customers and 5,672 active merchants
• A net loss of NZ$16.1 million

How to trade BNPL stocks

Derivatives trading – such as CFD trading – allows you to speculate on the price movement of Afterpay shares without actually taking ownership of them. CFD trading may prove attractive to some investors for a number of reasons, including the flexibility to trade stocks long and short, the ease of which it allows one to hedge, as well as the ability to gain larger exposure to an asset through leverage.

Follow the simple steps below to start trading BNPL stocks:

Trading BNPL shares

1. Create or log in to your trading account and go to our trading platform
2. Decide whether CFD trading is right for you
3. Search for the stock you would like to trade
4. Choose your position size
5. Open your position and monitor your trade