The “buy-now, pay-later” sector is seeing huge growth in Australia with the two biggest names being Afterpay Touch Group Ltd (ASX: APT) and Splitit Payments Ltd (ASX: SPT). So, which is better?
Business Model
Both Afterpay and Splitit have a “buy-now, pay-later” model that allows consumers to purchase goods and pay it back in instalments.
The key difference between Afterpay and Splitit is that Afterpay takes on credit risk, whereas Splitit does not.
Afterpay pays the merchant for the goods upfront and then charges the consumer on a fortnightly basis for the goods. As the merchant/retailer has already been paid, Afterpay takes on the risk of consumers missing payments.
Splitit, on the other hand, pays the merchant monthly when the consumer pays, thereby avoiding credit risk. To become a Splitit customer, you must have a valid credit/debit card, as this is where the payments are charged to monthly. They also offer longer repayment terms, from 2 to 36 months.
As a result of these longer payment terms and lack of credit risk, Splitit generally targets high-value items and merchants. The average value of purchases on Splitit is around $1000, compared to $140 on Afterpay.
Financial Performance
Despite high valuations and fast growth, both of these companies are currently making a loss. Splitit is a relatively new company, only listing on the ASX in January 2019. The data from the full year 2018 shows that they had revenue of just $790,000 and a net loss of $4.4 million. This equates to a basic loss per share of $29.45.
As of 31st December 2018, Splitit had 380 active merchants and 118,000 unique shoppers. Although revenue is very low, and the company is making a loss, revenue actually increased by 203% in 2018 and gross margin on sales revenue increased 562%. The company is growing quickly, and it may not be too long until they are making a profit.
Afterpay has been on the ASX since June 2017 and has seen its share price rocket to over $20 per share. Their underlying sales in 1H19 were $2.2 billion, almost entirely coming from Australia and New Zealand. Although underlying sales were high, Afterpay income was only $85.2 million and the company reported a loss of $22.2 million for the period after considering all other expenses. You can read about their earnings report here.
Summary
Although both of these companies have huge potential and are in an exciting space, the numbers don’t make sense to me. I consider myself a value investor, so I prefer to invest in companies with long track records of strong earnings.
On the surface, Afterpay looks like a stronger company with a bigger market; they now have 3.1 million active customers. Splitit is very new to the ASX and there just isn’t enough data to comment on long-term performance or whether it could be the next Afterpay.
If I had to invest in one right now, it would probably be Afterpay, but with both companies making a loss and with sky-high valuations, I’d rather look elsewhere.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
