The February FinTech Fail- Australian Investment Education. The movement in the buy-now pay-later sector has been something of a paradigm shift from credit cards. And old school lending facilities. After a huge year in 2020, companies like Afterpay. And Zip Pay are now starting to stretch valuations above and beyond what any investor could have predicted – but has the music stopped this February? Here’s our take on it:
Why 2020 was so big for buy-now pay-later
To first put into context how big 2020 really was for these FinTech companies. Take Afterpay (ASX: APT) as an example. This is a business whose share price rose from nearly $8.50 all the way to a high of just shy of $160 in a little under a year.
That’s somewhat of a 1780% growth in share price. Clearly dominating the buy-now pay-later space. Other companies like Zip Pay (ASX: Z1P) are also at the vanguard of this homegrown Aussie industry which blossomed in the COVID economy. However, as host Andrew Baxter questions – has the music stopped this February in 2021?
A perfect storm or troubled waters?
At the writing of this blog post, both Afterpay and Zip have both seen extremely large share price declines over the last month. Somewhere in the order of a whopping 25%. So how do such a strong businesses lose a quarter of their market capitalization in just under a month? As host Andrew Baxter points out. This is due to their stretched valuations post earnings announcements. To most investors surprise, both Afterpay and Z1P run at multi-million-dollar losses.
In the case of Afterpay, sales were up 106% as per their most recent report however still incurred a $79m loss on the bottom line. Z1P was much the same as they posted a $139m loss given they’d been spending on company growth. And acquisitions like it was going out of fashion. Yes, these companies appear strong on the surface and certainly put forward a strong case for their future relevance. However, looking at their financials the story is rather grim.
Afterpay or Z1P?
This is a tough question to ask given both companies have performed so well over the last 2 or so years. It’s easy to see that Afterpay has capitalised on their first mover’s advantage. Similar to companies like Uber, Afterpay has sustained itself as the household name in the FinTech space and is hence why their share price is 14x more than Z1P’s. With that said, Z1P has some strings to their bow that Afterpay certainly doesn’t.
Quite recently, Z1P made an acquisition of competitor, Quad Pay, in order to buy market share and bolster not only their vertical business, but also their horizontal business across various platforms. Out of two, host Andrew Baxter suspects that Z1P will be the first company to receive a dual-listing on the NASDAQ over in the US which is simply like hitting a homerun. From a fundamentals point of view, Z1P would appear to have the upper hand – as to which one is a clear winner in today’s market place, the jury is still out.
Threats and risks
With so much publicity and market domination, it comes to no surprise that these FinTech businesses are subject to some serious market and economical threats. First off, we have now seen the big 4 banks venture into the ‘interest free’ credit card space of late to try and emulate something of a buy-now pay-later set up. Targeting consumers apart of Generation Y, the banks have the working capital to now push their product hard and vast resources to defend their throne which poses a huge threat to these FinTech companies. Notwithstanding, companies like Afterpay and Z1P face massive risk on part of the consumer.
As a matter of fact, 1/5 users of buy-now pay-later are behind on their payments and 70% of these same people are have drawn upon interest bearing loans to service this debt. In any economy where 20% of Australians have less than $1,000 in savings, this is a tough market to operate in given the typical demographic of users includes those of a low-socio economic background who are bound to default on payments. The statistics are really quite harrowing and are made all the worse when such debt can be split up into 4 easy payments.
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The future for buy-now pay-later
There is no doubt that the buy-now pay-later, FinTech giants of Afterpay and Z1P are great homegrown Aussie stories. Nonetheless, the perfect storm is certainly starting to become troubled waters as we start to see its users take on too much debt and competition rise.
As host Andrew Baxter outlines, there has to be tighter government regulation on these FinTech companies to ensure that its typically vulnerable users aren’t being exploited. Yes, they do offer a great service in an innovative way to which they’ve seen insatiable growth in share price from, nonetheless the FinTech fail of February is a tell-tale sign that things may start to be changing – for better or for worse is yet unknown.
