Afterpay, Zip, Openpay and Sezzle share prices: a 2019 BNPL review

Trends of 2019

The Australian stock market was dominated by a few key themes during 2019: The royal commission and the impact it had and is having on Australia’s once-thought untouchable big four, a short-lived spike in iron ore prices that saw the likes of FMG, Rio Tinto and BHP rush to multi-year highs; and arguably the most frenetic of the lot: the explosion of the buy now pay later (BNPL) space.

A market footnote just a couple of years prior, BNPL companies like Afterpay and Zip have come to dominate news headlines across Australia. Often for the right reasons: explosive growth and a bullish outlook from a swatch of big-name brokers, but also sometimes for the wrong reasons, with many commentators questioning the very nature of their business models: in the case of APT, is the company a credit provider in disguise? In the case of both Zip and Afterpay: are their business models sustainable? Is there any real competitive advantage here?

Tough questions that investors in a buying spree have little time to answer or concern themselves with, it would seem. Afterpay (ASX: APT) was the sixth best performing stock on the ASX 200 during CY19 – rising 142% in that period.

Zip (ASX: Z1P) – arguably Afterpay’s most fierce Australian competitor – but not yet apart of the illustrious ASX 200 index – saw its share price more than triple during the calendar year, rising 242%.

2019 also saw a raft of smaller BNPL companies list on the ASX – in search, most likely, of dominating (or at least carving out a piece of) a market that Goldman Sachs estimates to be worth some $1.0tn – across ANZ, UK and US.

The BNPL capital spree

Looking at the specifics, during the year, Openpay, Sezzle and Splitit – all BNPL companies – all with slight twists and tweaks on Afterpay’s so-far stratospheric growth formula, listed on the ASX.

Openpay (ASX: OPY) raised $50.0m as part of its IPO, issuing stock at an offer price of $1.60, Sezzle (ASX: SZL) raised $43.6m at an offer price of $1.22 and Splitit (ASX: SPT) raised the least of the bunch, taking in $10.0m at an IPO offer price of $0.20 per security.

On the basis of those IPO offer prices, Openpay investors are the only ones under water.

In addition to those IPO raises, BNPL companies have tapped the markets to raise both debt and equity as they pursue an expansionist agenda.

Afterpay recently took $200m from Coatue Management in exchange for 7,017,544 fully paid ordinary shares, a move that built on the $317m the company raised through an institutional placement during the middle of 2019; Zip recently raised $60m from institutional investors as it pushes head-long into a global growth agenda and Sezzle upsized its current debt funding facility to US$100m.

Ultimately, BNPL companies such as Afterpay and Zip require capital, amongst other reasons, to fund their receivables growth. In the case of Afterpay, such capital intensive practices has also generated questions surrounding shareholders dilution.

The AFR ominously noted:

‘Afterpay investors know some sort of dilution is coming. They just don’t know how painful it will be.’

Others like UBS have been keen to point out that competition and regulation has the chance to disrupt the fervent buy now pay later party. Accordingly, UBS has SELL recommendations on both Afterpay and Zip.

By traditional metrics the likes of Afterpay and Zip do indeed trade on a lofty set of multiples. For example, Zip’s most recent quarterly revenue of $31.0m is a struck against a significant market capitalisation of $1.42bn.

Looking at the overall broker consensus however such angst is not well reflected by the analyst outlook: both Afterpay and Zip have BUY ratings on average, according to Bloomberg Data.

The average 12-month price target is also somewhat above current levels – for both companies: Afterpay ($34.27) and Zip ($4.25) – according to Bloomberg Data.

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