Buy now, pay later (BNPL) companies were once again some of the most traded shares on the ASX last week, with Zip Co Ltd (ASX: Z1P) and Afterpay Ltd (ASX: APT) taking out first and second place, respectively, on CommSec.
According to CommSec data, buyers and sellers accounted for relatively equal trade volumes, which would indicate that while some investors are buying the dip, others may seeking opportunities elsewhere.
What’s happening to BNPL valuations?
While valuations have pulled back fairly significantly over the past six weeks, it’s worth noting the total returns some of these companies have generated over the last 12 months. Since the lowest point of the market in March last year, Afterpay has returned over 1100%, Zip 620% and Sezzle Inc (ASX: SZL) 1900%, just to name a few.
This time last year, countries were going into lockdown, borders were closing and economies were bracing for disastrous recessions. So why would loss-making growth companies become the biggest beneficiaries compared to more defensive industries?
The conditions for BNPL growth were the perfect storm in hindsight, with stay-at-home restrictions promoting retail spending, further encouraged by ultra-loose monetary policy implemented by central banks, with the objective of keeping interest rates low and encouraging spending.
Stimulus packages were handed out and welfare payments were increased, with superannuation withdrawals another likely explanation for an increase in discretionary spending.
What now?
In the same way that many of these factors have provided a boost to BNPL companies, any sort of reversal or change in these factors may result in a slowdown or have the opposite effect on their performance.
You’ve probably heard about rising bond yields and inflation by now and the threat this could have on growth stocks like Afterpay and Zip. If bond yields continue to rise, it seems likely that tech valuations could drop further than they already have.
Stimulus in Australia won’t last much longer, with JobKeeper coming to an end on 28 March 2021. The JobSeeker payment will also stop including the Coronavirus Supplement towards the end of March.
Summary
While I don’t think the ending of stimulus packages will ultimately mean that BNPL companies will struggle to succeed in the long-run, the point is more to illustrate why the sentiment might’ve been changing recently.
Are BNPL companies good value after this recent pullback? Personally, I don’t think so, but if you’d like to know my reasoning behind this, click here to read: 1 easy way I value Zip shares: Are they dirt cheap?.
