Afterpay Ltd (ASX: APT) shares seem to be feeling some heat as PayPal just launched its credit card in Australia. And now, UBS analysts expect a ‘significant drop’ in Afterpay’s growth rate.
APT share price
UBS expectations fall
According to the Australian Financial Review, UBS has slapped on a long-term sell rating on Afterpay.
This decision is due to risks of growing competition, more challenging regulation and concerns surrounding growth plans. The high valuation also played a part as well.
A UBS analyst believes Afterpay’s growth in Australia has reached maturity given its share of volume of all payments in Australia for the March quarter of 2021 fell to 1.04% from 1.19% in the December quarter of 2020.
UBS is also concerned that the average fees charged by Afterpay to merchants of 4% compared to its estimated cost of an average debit payment of 0.45% is getting too high.
To add more to UBS’ worries, there is growing speculation that regulation of the buy-now-pay-later industry will tighten in the future.
Is UBS on the money?
Although growth in Australia may be close to reaching its peak, I think more focus should be placed on North America and the UK.
Afterpay managed to record 127% growth in North America and 161% in the UK, albeit off a lower base.
Given the low barriers to entry in the BNPL space, it’s important to pay close attention to the competitive environment. Why so?
Low barriers to entry inevitably mean more competition, leading to compression on industry margins. Then, it becomes a volume-based game.
This is why I prefer to invest in businesses that are capable of developing a sustainable competitive advantage to block out new entrants as per the Rask Investment Philosophy.
If you are on the hunt for ASX small-cap shares, check out the Rask Rockets Beyond program. You might want to hurry – the mission is opening to new members this Thursday night!
