The BNPL (Buy-Now-Pay-Later) space has investors divided, on one side there is a belief that it is the next big craze and will become the payment method of the future. On the other side, many think some of them have a runway too high on hype. The question remains can APT and Z1P grow earnings to justify their massive market capitalisation?

The main distinction between BNPL and a personal loan is that most BNPL companies charges very little interest or none at all, and make their profit-taking through a cut of the sale.

It is hard to find a stock market forum or news website that hasn’t mentioned stocks like Afterpay (ASX: APT),  Zip Co Limited (ASX: Z1P), and FlexiGroup (ASX: FXL). But it hasn’t stopped there as there is a large emergence of BNPL brands that have hit the market such as – EML payments (ASX: EML), Splitit (ASX: SPT), and WISR (ASX: WZR). This doesn’t include the likes of Latitude that isn’t yet listed, and CBA backed Klarna which is based in Sweden.

The BNPL space itself comes with much scrutiny, similar to that which credit cards and personal loans have previously received. Especially when you consider they are targeting the younger demographic, teaching them they can purchase something without saving for it. This is sending a message to millennials that they can buy what they want now and not have to wait.

But….

The positives are that if you find yourself in trouble, many of the BNPL options are far better than owning a credit card. Credit cards can be a trap with massive fees and interest rates. Afterpay, for example, has a cap on late fees and does not charge any interest on the borrowings. This is a far better option than the traditional credit card. But you need to read the fine print before you sign up as each provider has slightly different fee structures and some do charge interest.

The trap that people can still fall into is that they connect their credit card to their BNPL provider like Afterpay. Some will say that you should only be allowed a credit card or BNPL account if you can prove you can service the repayments. A credit check is done by credit card companies, but BNPL options up to $1,000 generally don’t. Regardless, people’s circumstances can change very quickly, especially in the COVID-19 environment where discipline and common sense need to be used.

So let’s have a look under the hood of some of these companies.

APT – Afterpay Ltd listed in 2017 and has risen by over 2000% since. To put this in context if you bought $2,000 worth of the stock it would be worth around $40,000 today. It now sits as the 19th largest stock listed on the ASX and has a market capitalisation of 19.41 billion. This is a whopping 52 times its sales revenue. To put this into perspective, another popular tech stock – Appen (APX), runs at 8 times Price to Sales.

APT will need to grow revenue by 919% to bring it in line with other Tech companies and 2449% to bring it in line with the likes of CBA or BHP. So compounding APT revenue at 80% per year it will take over 3 years to catch up to APX and over 5 to catch up to BHP or CBA. This assumes that they stay at the current share price.

APT is rapidly growing into overseas markets and with talks of other potential revenue streams, if APT continues to take the right steps forward they could pull it off.

Afterpay recently went to the market to raise $800m, the institutional placement closed at $66.00 with the retail share purchase plan due to close on the 30th of July with new shares trading on the market on the 7th of August. With the SPP fully subscribed APT will issue approximately 4.5% more shares.

Around 1 third of the capital will be going to APT’s founders Eisen and Molnar who are selling 2 million shares each at $66 as part of the share purchase plan. This puts around $536 million into Afterpay which will help them -position themselves to continue to push into overseas markets whilst remaining competitive.

FXL – Flexi Group ltd has been listed since 2006 and is a well established small-cap company sitting as the 295th largest stock on the market with a market cap of $519.2 million. Flexigroup is well established and runs 5 main brands.

Bundll which is a BNPL Mastercard (credit card) that allows you to buy anything, anywhere, no interest ever.  At the basic level, you can access $1,000 without a credit check and start spending. At this level, there aren’t any fees other than late fees of $10.

Humm is very similar to Afterpay in the way you sign up and has set repayments with no interest.

SKYE is a credit card with 110-day interest-free, with options up to 60-months interest-free with some retailers.

They also offer commercial financing, and a credit card service into New Zealand.

Flexigroup is profitable and is much cheaper than APT in regards to share price vs earnings, with a PE of only 9 and is running at only 1.1 share price to sales. Flexigroup however hasn’t got the following or expectations of strong growth that APT has.

Z1P – Zip Co Ltd-  is a very similar offering to Afterpay and was listed in 2009, making it the 118th largest company on the ASX with a market cap of $2.47b.

ZIP pay is for customers who stay under $1000 as a balance and allows them to BNPL with no risk of interest rates being charged.

ZIP money, on the other hand, can go above $1000 but is only 0% interest for 3 months. With promotional offers going up to 48 months. However, once your interest-free period is up you will then be charged 19.9%.

ZIP Co acquired US company Quad Pay in June which gives them access to the US retail markets.

Z1P for the past 3 years has delivered negative earnings and is running at 21 times the price to sales. Z1P has a much better growth rate than FXL, at this stage, they are expected to produce around a 90% growth in revenue this year.

SPT – Splitit ltd is a slightly different concept in that they offer an option at check-out that allows people that are paying with a credit card to split their payments up over a period of time. With no added interest or late fees. Splitit charges a small percentage on every sale back to the retailer.

SPT sits at the 354th largest company on the ASX at a market cap of $357 million. They are currently not profitable. SPT is running at 155 times share price to sales.

Splitit also recently raised capital to the tune of $100m at a price of 1.30. A large percentage of these funds will go into sales and marketing, as they try and grow their share of local and offshore markets.

In summary:

SPT, APT and Z1P are in a strong growth stage, all growing revenue more than 80% per year. They have negative earnings still so are yet to produce a positive Price/Earnings Ratio. APT is the most expensive compared to Revenue and Earnings.

FXL is more of a well developed and mature company but hasn’t been able to get onto the same growth path as the others. If FXL can start to show some growth on their BNPL platform Humm it would be a good pick, so we are placing this on our watchlist for now.

If you are looking for a strong growth stock in the BNPL space on the Australian market, Z1P would be the pick. With an expected growth in revenue of 92% and running at a much lower price to sales than the others. This means just based on numbers if Z1P continues to meet expectations on revenue growth, it is a much cheaper buy than APT.

Just be aware that growth stocks like these can be extremely volatile and need to continually justify their high valuations by continually growing revenue year on year by high multiples.

At this stage, Emerald Advisors don’t have any buy recommendations on the above stocks, but we will be looking closer at them through the August reporting season.

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