Afterpay: Has the sun set on buy now, pay later shares?

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Over the past few years, Australians have flocked to buy now pay later services (BNPL) due to an explosion in companies offering this service, including Afterpay, Zip.co, Sezzle and Splitit to name a few. The attraction of these BNPL services has also seen share prices skyrocket as retail investors speculate on these fintech companies.

Afterpay (APT) has performed the best, up 261% between January 2 and October 20 this year while Zip.co (Z1P) was up 200% between January 2 and August 27. But has the sun set on these stocks or is there more to come?

The Information Technology sector has been the best performer this year up more than 40% while Energy has been the worst despite a 33% gain so far this month, it is still down more than 20% for the year. In my opinion, these BNPL stocks have had their day and like all stocks in new and exciting areas that have spectacular rises over short periods of time, they eventually come back down to earth.

afterpay buy now pay later

The challenge for companies in the BNPL space is that the big players in the short-term finance and payment gateway system have sat back and let these new fintechs develop the market and appetite for BNPL. In essence, they let the new players take all the risk and now the big players are beginning to enter this space.

Mastercard, Visa and in the last few weeks' PayPal have now entered this space in the US market capturing more than 25% of the market, which has sent shock waves among the other BNPL players. These big players also have their sights set on the Australian market.

While it is possible that companies like Afterpay and Z1P will survive and grow despite these big players, the success or failure of these new Fintech companies will be determined by how flexible and responsive the big companies are to their clients, rather than how innovative they are.

Mastercard, Visa and PayPal are well established in the payments industry, as each has a significant number of clients to market their BNPL service to and if they get it right the new fintechs will struggle to grow. Right now it is too early to tell how much effect these big players will have on this industry, but in my mind young BNPL stocks have had their day in the sun and investors would be wise to think about exiting this space and to come back after the dust settles on this battle.

Best and worst performing sectors this week

Our market has, once again, performed well with most sectors up for the week. Energy is the best performer so far up more than 8% followed by Materials and Utilities, which are both up more than 3%. The worst performing sectors include Healthcare down more than 2% while Industrials and Consumer Staples are so far even for the week.

Looking at the ASX/S&P top 100 stocks, the best performers include Whitehaven Coal who has risen strongly again as it is up more than 16% while Origin Energy is up more than 13% and Pendal Group is up more than 11%. The worst performers include Virgin Money down more than 11%, while Evolution Mining and Northern Star Resources are down more than 8%.

What to expect from the markets

November has been a very good month with the All Ordinaries Index up more than 11% and now in positive territory for the calendar year after being down for most of 2020. While I remain confident that our market is bullish and will remain so until late January and possibly into February, it is currently running very fast as it has only had two trading days down in the last 18 days.

This strong momentum will slow soon and, as a result, we may see the market fall for one or two weeks as we move into Christmas. We need to remember that during the second half of December, as we move closer to the festive season, the volume of stocks traded will decrease and this may be the catalyst for the brief pull back in the market. That said, my expectation is that All Ordinaries Index will continue to move up to break above the previous all-time high of 7289 set in February of this year.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.