Is the ‘Buy Now, Pay Later’ Bubble about to Burst? — BNPL Trend

In today’s Money Morning…growing fears of a broader economic slowdown…big-time players to take on the BNPL trend…the real losers in all of this…and more…

It’s no secret that ‘buy now, pay later’, or BNPL, stocks have become a hit with Aussie investors.

The likes of Afterpay Ltd [ASX:APT], Zip Co Ltd [ASX:Z1P], and Sezzle Inc [ASX:SZL] have taken the ASX by storm. A trend that we’ve talked about at length over the past 18 months or so.

But, more recently, it appears as if the BNPL hype train has stalled.

All three of these stocks have either traded sideways or lower in the past few months — a sign, perhaps, that the incredible momentum behind these stocks has tapered out.

Obviously, this could be due to growing fears of a broader economic slowdown. Something that is a real possibility given the eventual fall off of pandemic-related handouts.

Even if that may seem hard to justify considering both Sydney and Melbourne are in lockdown right now…

I suspect, however, that most investors are waiting for more concrete details about the BNPL sector’s growth — or lack thereof. The kind of confirmation that will likely become apparent once APT and Z1P release their annual reports in August and September.

But the real spanner in the works could be the new competition…

Big-time players to take on the BNPL trend

As you may have already heard, both PayPal and Apple are looking to jump onto the BNPL bandwagon.

PayPal is already in on the action, launching a ‘pay in 4 service’ earlier this week with no fees. Which, as you’d expect, can be used anywhere PayPal is accepted.

So, this is a huge challenge to the likes of Afterpay, Zip, and Sezzle. One that has already started to weigh on their respective share prices.

Then there is also Apple…

With the US$2.5 trillion tech behemoth set to encroach even further into the payments ecosystem. Reports suggest that Apple is working hard on a new BNPL service that will tie directly into their Apple Pay offering.

This is clearly an escalation within the BNPL sector that we haven’t seen before.

One that will present some serious challenges for our local BNPL players.

More importantly, though, it could also stymie their ambitions internationally. With both Afterpay and Sezzle hungry to win over the US market, while Zip has more interest in the UK and parts of Europe.

With PayPal and Apple now in the mix, these global expansions could be far harder to secure.

Time will tell how all of this pans out.

But does this mean that the BNPL ‘bubble’ is going to burst?

Are Afterpay, Zip, and Sezzle all about to crash, hard?

I wouldn’t count on it.

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The real losers in all of this

See, while PayPal and Apple will certainly make life harder for the BNPL cohort, it won’t necessarily be their end entirely.

After all, Afterpay in particular (as one of the earliest pioneers of BNPL) has been fighting off competition for years now. Swatting down both small and big names on their incredible rise to a $30 billion company.

There is more to their success than simply a four-instalment payment scheme.

The marketing and branding from Afterpay in particular is a huge factor in their success. Something that you can see emulated by both Zip and Sezzle.

All three companies know their target market well and know how to appeal to them.

Quantifying this on a balance sheet, though, is a lot harder to do. The kind of intangible brand loyalty that every business strives for, but few achieve. Much in the same way that Apple products have a cult-like following.

For this reason, I don’t think any of the three major BNPL players will simply roll over and die quietly.

In fact, I think the banks are once again going to be the hardest hit by PayPal and Apple’s entrance into this market. Making their credit card offerings even less appealing as millennial spending continues to move toward more digital, app-based solutions.

Does that mean I’m going out and loading up on APT, Z1P, and SZL shares?

No, it doesn’t.

Because at this stage, despite the lapse in momentum, these stocks are all still very pricey. All three are valued on the expectation of some seriously crazy growth in the coming years. Which is fairly risky considering the less-than-clear outlook for the future.

Again, though, that doesn’t mean I expect any of them to fail anytime soon either.

If there is one thing that the BNPL sector has shown it is renowned for, it is adaptation. A trait that I would wager will ensure they’re likely to stick around for quite some time.

As for who will come out on top, though, no one knows right now.

Give it some more time, and we will likely find out who the real winners and losers are…

Regards,

Ryan Clarkson-Ledward,
Editor, Money Morning

PS: Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.