6 August 2021
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AP Photo/Mary Altaffer

Will the share prices of Afterpay & Zip fall or soar?

Peter Switzer
15 July 2021

The buy now pay later (BNPL) market darlings — Afterpay and Zip — have some big bully boy businesses keen to eat their lunch so investors in these companies have a Dirty Harry question to answer.

What question? Here it is: “Do you feel lucky punk? Well, do you?”

If as an investor in these tearaway success stories you do feel lucky, you’ll see this sell off as a buying opportunity. But if you think these success story operations are on death row, you’ll cash out ASAP.

I hold Zip shares and am faced with this very Dirty Harry question!

The share prices of Afterpay and Zip fell by around 10% yesterday when the news broke that Apple was getting into the BNPL game. This is just another competitor to add to the virtual conga-line of potential new players in this lucrative space.

There have been stories that CBA was going to take on this market for months and has taken 20% of a Swedish BNPL business called Klarna. Then there were reports that Klarna has taken 4% of Zip only last week!

These charts show how successful these companies have been and is why the big boy bully companies are out to eat their lunch.

Since launching, Zip’s share price is up a big 308%, while Afterpay’s share price is up a whopping 3,527%!

Afterpay (APT)

Zip Co. (Z1P)

The SMH says Apple was working on a plan to offer Afterpay-style instalment loans to its tens of millions of US customers along with investment bank giant Goldman Sachs. Meanwhile, PayPal has launched a rival BNPL product with wait for it, no late fees!

But wait there’s more trouble for the incumbents in BNPL land. PayPal will be directly competing for all sales and is set to charge merchants only 2.6% on sales, while Afterpay charges 4%. And the latest leaks say CBA is going to charge 1% and other banks are bound to follow.

In the SMH, Elizabeth Knight says CBA will offer its service to its transactional customers, while Apple will be offering its service to its iPhone and other customers. Collectively, that could be a lot of customers.

“More than 37 per cent of Australians count CBA as their main financial institution and more than 55 per cent of Australians have an Apple phone,” Knight quite rightly points out. And she makes the point that analysts see the CBA as a defensive move and also as a play that might make the regulators look more critically at what BNPL businesses do.

So with a hoard of lunch-eaters coming for our BNPL businesses, the Dirty Harry question looks easy to answer: “No, I don’t feel lucky and I’m not a punk!”

But wait, there could be more you have to think about. Try these:

  1. Will the buying customers who use BNPL go back to the banks? A lot of young people just don’t like banks! Five years ago, Amazon was going to devour Harvey Norman’s and JB Hi-Fi’s lunch — it didn’t happen and their share prices have doubled since!
  2. Zip’s revenue “jumped by 80% in the March quarter in annual terms, amid a surge in transactions in its crucial United States business, Quadpay.” (SMH)
  3. In the US, BNPL only accounted for about 2% of online spending, and some analysts had predicted this figure could rise to between 10% and 20%.
  4. There’s a belief that the arrival of the big bully boys of business to the BNPL sector will actually grow the entire sector, bringing in new customers who’ll use these services.
  5. Only a week ago, Zip’s share price spiked 13.74% in five days. Citi had a price target of $10.25 and its analyst would’ve been aware of the looming threats of new big players coming to the sector. If that’s right, there’s a 40% gain out there for the courageous punk!

Fortunately, I bought into Zip at much lower prices than today so I do feel lucky and will stick with the company. I never expected the huge swings I’ve seen with companies like Afterpay and Zip, but I do believe that they are companies of the future in a market that’s growing.

I also liked this revelation from Zip’s co-founder, Peter Gray that “Zip has about 2.5 million customers and it is thinking about other financial services it could provide to this mainly younger cohort,” SMH’s Clancy Yeates recently reported. “So far it’s offering business loans as well as BNPL, but it’s flagged the possibility of offering cryptocurrency trading, share-trading, or high-return savings accounts.”

And I can’t let go of Gray’s argument that banks and their credit cards are simply not liked by young people, who are the future.

I’m sticking with my Zip stocks and could buy more if the price falls significantly from here.

P.S. This isn’t financial advice but my best guess on a stock that I have in my smaller, more speculative bucket of stocks.

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