Important announcement:

nabtrade will be unavailable between 00:00 and 12:45 on Sunday 26th of May for scheduled maintenance.

The US markets shift to T+1 settlement and the FX PDS update both take effect on Tuesday 28th May 2024.

7 buy now, pay later stocks to consider

Look beyond Afterpay and Zip for BNPL opportunities.

It’s capital-intensive, it’s an area of intense competition, regulators continue looking askance at it, defaults are predicted to rise (but haven’t, as yet), the share prices go through the roof – but there are no profits yet to be seen.  Welcome to the world of the buy-now, pay-later (BNPL) stocks – or as some people call them, the buy-now, profit-later stocks.

The BNPL platforms allow customers to buy things now, receive them now, and pay for the purchase in instalments, over time, without having to pay interest. The platforms charge the retailer a fee per transaction – retailers are happy to pay this, because it allows shoppers to spend money they don’t have, boosting sales.

BNPL is an alternative to credit cards. The platforms effectively lend you the full amount of the purchase (less your first instalment) but they don’t charge you interest. Of course, if you link your credit card to your BNPL account and are unable to pay off your credit card balance on time, the experience will not be “interest-free.”  It’s “fintech” innovation – but investors struggle to understand how the companies, which have yet to make a profit, can perform so well on the share market.

Everybody knows the story of the big kahuna of BNPLs – the first anyone had heard of “buy now, pay later” was when payments disruptor Afterpay listed on the ASX in May 2016, after raising $25 million at $1 a share in a heavily oversubscribed initial public offering (IPO), capitalising the company at $165 million. It now trades at $101.85, for a market value of $28.9 billion.

At this price, I don’t think you can buy Afterpay anymore – but there is probably reasonable value still to be had in Zip Co, Splitit, Sezzle and Laybuy.

There are a lot of new figures to get your head around: gross merchandise value (also known as underlying sales or total transaction value), net transaction margin, active customers, active merchants, repeat customers as a percentage of active customers – but not the traditional ones such as price/earnings (P/E) ratios, dividend yields or net tangible asset (NTA) values.

Here’s a look at the BNPLs:


1. Afterpay (APT $101.85)

Market capitalisation: $28.9 billion
FY20 Revenue: $450 million
Trading on 64.3 times revenue
Expected $941 million revenue FY21 – so 30.8 times forward revenue
Expected $1,408 million revenue FY22 – so 20.6 times forward revenue
Expected EPS 9.9 cents FY22 – so forward P/E 1,033.2 times
Expected EPS 47.5 cents FY22 – so forward P/E 215.3 times

Afterpay is a payment facilitator that allows its users to split the cost of purchases into four equal two-weekly instalments over six weeks (with the first instalment paid at the time of purchase). Afterpay pays the retailer upfront and assumes all payment risk. It does not charge its users interest, caps late fees and pauses accounts when customers miss a payment. Its revenue is derived by charging retailers a percentage cut of the merchant sales facilitated by the Afterpay service.

Afterpay does not charge interest or hidden fees, and caps late fees so that they don’t accumulate. Accounts are locked when customers miss a single payment. The model has caught on with young consumers, and more importantly, the retailers keen to sell to them.

Afterpay’s first-mover advantage has given it terrific clout, and its chances of success in the massive US market – and to a lesser extent, the UK market – are what investors are prepared to back. Afterpay entered the US in 2018 and now has more than 6.5 million customers there. It is a US$5 trillion ($7.1 trillion) retail market, five times the size of the Australian market.

But APT is just too expensive – there is too much market success baked-in to the share price.

Take a look at the analysts’ consensus valuations: $105.65 (Thomson Reuters, 12 analysts), $92.383 (FN Arena, six analysts)

The target prices range from $115.00 (Morgan Stanley and Ord Minnett) to $30.00 (UBS).

UBS rates Afterpay as “sell,” although the broker acknowledges, in the absence of a catalyst, the market is likely to view the valuation differently – as plenty of other analysts do!

Afterpay’s FY20 Revenue was $450 million – which means that at its market value of $29,015 million, it trades at 64.5 times revenue. That is coming down, but it is too high. For example, data annotation and artificial intelligence company Appen, which is arguably Australia’s premier “tech” stock, trades at 7.7 times FY19 (December) revenue.

You can’t even use a P/E ratio, because there are no earnings yet. Analysts expect Afterpay to make a profit in FY21.


2. Zip Co (Z1P $6.02)

Market capitalisation: $3.1 billion
FY20 Revenue $156.99 million
Trades at 20 times revenue
Expected $355 million revenue FY21 – so 8.8 times forward revenue
Analysts’ consensus target price: $8.24 (Thomson Reuters, eight analysts), $6.694 (FN Arena, five analysts)

Afterpay’s biggest rival is Zip Co, whose BNPL products are Zip Money and Zip Pay. Zip Pay is an interest-free BNPL service. Zip Pay provides its customers with a line of credit of up to $1,000, which they can use to make purchases at over 22,000 participating retailers: Zip pays the retailer and the customer then makes weekly, fortnightly or monthly repayments to Zip to pay off their account balance. Zip Money is a slightly different product: it is a line of credit for amounts over $1,000, so it can be used to make larger purchases: however, unlike Zip Pay, Zip Money is not 100% interest-free. Each transaction has a guaranteed interest-free period of three months, but after that, you start incurring interest.

Like Afterpay, Zip Co is eyeing the bigger markets of the US and the UK (it also operates in South Africa and New Zealand.) In September, Zip Co completed the “transformational” purchase of US BNPL provider Quadpay Inc., for $200 million, which brought 2.2 million customers with it – almost doubling Zip’s customer numbers, to 4.5 million. It also brought transaction volume of $322.5 million in the September quarter, helping transaction value to almost double from a year ago, to $943.1 million.

Zip Co also has a couple of other strings to its bow. It owns Pocketbook, a leading personal financial management tool. Zip also acquired Spotcap, an online lender that offered unsecured loans to small businesses, in 2019: now rebranded ‘Zip Business,’ this facility aims to provide $100 million access to lines of credit, while also offering products that helps the business customers with their cash flow management.

Analysts don’t see Z1P making a profit before FY23. But they also see it as offering plenty more buying value than Afterpay.


3. Splitit Payments (SPT $1.36)

Market capitalisation: $583 million
FY20 Revenue $2.35 million
Trading at 248 times revenue
No estimates of revenue FY21
Analysts’ consensus target price: not available

The Israeli-based Splitit has a big point of difference to Afterpay (and its other BNPL peers). While they lend their customers the full amount of a purchase at the checkout, and then allow that purchase to be paid off in instalments, Splitit allows customers to pay with an existing credit or debit card, holding the full amount on their card and taking an instalment each month. The customer can apportion the total cost across as many interest-free payments as they like: the Splitit system charges their credit or debit card every month until their payment is completed. Splitit does not finance the consumer into the purchase, meaning it does not make short-term consumer loans.

This means that worries about credit risk and bad-and-doubtful-debt build-up – concerns that have swirled around the other BNPL stocks – are not business risks for Splitit. Thus, it has a lower-risk business model than the others.

There are a couple of other features that stand out for SPT. In September, Splitit announced a new partnership with Quickfee, a leading professional services payment provider. Through the collaboration, Splitit is entering the professional services market, enabling law and accounting firms in the US and Australia to offer instalment payments on their credit cards to help firms and their clients pay over time, while still getting access to accounting and financial advice.

While retail e-commerce sales worldwide amounted to US$3.5 trillion ($5 trillion) in 2019 and are projected to grow to $6.5 trillion ($9.3 trillion), Splitit says professional services is its gateway to expand into the “enormous” US$120 trillion ($171 trillion) global commercial payments market

The other feature – which paying professional services fees plays into – is that Splitit has an older customer demographic buying bigger-ticket items than Afterpay’s and Zip’s customers do. Splitit’s average order value (AOV) stands at about US$909 ($1,298), whereas Afterpay’s average transaction value is $153, and Zip’s average “basket size” in Australia/New Zealand is about $180. Splitit says this comes from consumers using the service for higher-value purchases including homewares, furniture, sporting goods and luxury retail.

SPT came to the ASX at 20 cents in January 2019 and surged quickly to $2.00 – the COVID Crash in February/March gave investors a second chance with the stock, returning it to 22 cents. Splitit took off again, reaching $1.86 in August, but it has retreated to $1.36.

I couldn’t find any broker valuations on SPT, which makes it difficult to get any sense for how the professionals value the stock – the company is a long way from profitability. But I think it has a couple of attractive features that could pay off at the current discount.


4. Sezzle (SZL, $6.69)

Market capitalisation: $1.32 billion
FY20 (December) forecast revenue $77.6 million
Trading at 16.7 times revenue
Estimated revenue FY21 $125.5 million – trading at 10.3 times forward revenue
Analysts’ consensus target price: $11.27 (Thomson Reuters, two analysts), $11.80 (FN Arena, one analyst)

The US-focused BNPL offering Sezzle is another that is not seen as being profitable before FY23, but the analysts that do cover it like the stock a lot.

Broker Ord Minnett was impressed with the September quarter update: the company reached almost 1.8 million active consumers and is close to its target of annualised underlying merchant sales (UMS) of US$1 billion ($1.4 billion) for September. The combination of strong customer additions along with an increasing trend for average spend per customer, says, Ord Minnett sees Sezzle well positioned to keep growing its UMS numbers.

SZL’s share market trajectory exemplifies BNPL. Despite being a US company, it listed on the ASX in July 2019 because it felt that Australian investors already understood the BNPL operating model. Issued at $1.22, the stock jumped 80% instantly, and went as high as $2.67 in later weeks. But by March 2020 it was back to 58 cents, in the COVID Crash. After that, it rocketed to $11.34 in August, before retracing back to current levels. Analysts see it getting back above $11 – but they also do not see it being profitable until FY23 at the earliest. You have to take it on faith.

Smaller players:


5. Laybuy Group Holdings (LBY, $1.405)

Market capitalisation: $245.1 million
FY20 (March) revenue NZ$13.7 million ($12.9 million)
Trading at 19.1 times revenue
Analysts’ consensus valuation: $2.61 (Thomson Reuters, two analysts)  

Kiwi BNPL provider Laybuy came to the ASX in September, with an IPO offer price of $1.41: the shares opened at $2.00 and reached as high as $2.06 on its second day, but that was about as good as it got and the Laybuy share price has since been sold down to the offer price.

Laybuy’s differentiation is that its payment platform that enables customers to split the payment of purchases, both online and instore, across six weekly interest-free instalments. Its digital card enables customers to skip a number of steps compared to other BNPL. The company is the dominant BNPL provider in the New Zealand market, and also operates in the highly competitive Australian market and relatively young UK market, where it has signed prominent relationships with English Premier League (EPL) football clubs Manchester United, Manchester City and Arsenal.

It also has an interesting feature with its Laybuy Boost, which allows customers to increase the value of their purchase by providing a larger first payment in one seamless transaction. This lifts LBY’s return on investment as it charges its commission on the total value of the transaction. Another distinct offering is Laybuy Global, which allows customers to buy products online in their local currency with a merchant in a different country.

Also, Laybuy says its BNPL Mastercard, which it recently launched in Australia, is “globally unique and innovative” – it allows customers to buy goods and services in-store using Laybuy with a tap of their smartphone.

Laybuy’s revenue in FY20 was NZ$13.7 million ($12.8 million) – half of that from the UK. At present, it is capitalised at trades at $245 million, meaning it trades at 19.1 times revenue. At August 2020, Laybuy said its annualised revenue run-rate was NZ$28.2 million ($26.6 million), which brings down the asking price to 9.2 times revenue.


6. Zebit (ZBT, $1.14)

Market capitalisation: $107.5 million

Despite raising $35 million from its IPO and floating on the ASX, Zebit does not actually operate in Australia but rather focuses operations in the US, where it offers BNPL services to customers with six months to make interest-free repayments. The company’s BNPL offering ‘Zebit Marketplace’ targets what it calls “credit-challenged consumers,” of which Zebit says there are about 120 million in the US. It says its proprietary data and analysis enable Zebit to deploy predictive models at registration and checkout using this information to understand the credit risk of a customer and each order.

ZBT struggled in October on its first day on the ASX screens: issued at $1.58, the CHESS depositary instruments (CDIs) closed their first day at $1.045, but have recovered somewhat, to $1.14.

In the September 2020 quarter, Zebit says it made positive EBITDA (earnings before interest, tax, depreciation and amortisation) of US$130,000 ($185,700), its first positive EBITDA quarter since it was incorporated in 2015.

However, Zebit is from the home of the brave – and without analyst coverage, only for the brave.


7. Openpay Group (OPY, $2.73)

Market capitalisation: $295 million

FY20 Revenue $18 million
Trading at 16.4 times revenue
Estimated revenue FY21 $33 million – trading at 8.9 times forward revenue
Analysts’ consensus target price: $5.00 (Thomson Reuters, one analyst)


8. FlexiGroup (FXL, $1.045)

Market capitalisation: $517 million

FY20 Revenue $465.7 million
Net profit $26.4 million
Earnings per share 6.49 cents
Trading at 1.1 times revenue
About to change its name to Humm
Estimated EPS FY21 11.1 cents – trading at 9.4 times expected earnings
Analysts’ consensus target price: $1.358 (Thomson Reuters, three analysts), $1.393 (FN Arena, three analysts)


About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.