Share Prices within The Buy Now Pay Later Sector continue to struggle
Two months ago, I wrote about the tough conditions gripping the Buy Now, Pay Later sector and asked whether the agreed takeover scrip bid by Zip Co Limited (ASX: ZIP) for Sezzle Inc (ASX: SZL) at 0.98 ZIP shares for 1.00 SZL shares was a marriage of convenience or a marriage of necessity. Since then, the share prices of both companies have more than halved from $2.21 to $1.02 for ZIP and from $1.78 to $0.84 for SZL.
Two pieces of information are worth highlighting. To recap, Nick Molnar and Anthony Eisen did an extraordinary job in timing the sale of Afterpay to Square, at a ratio of 0.375 shares in Square class A common stock for each Afterpay share. The transaction was announced in late-July 2021, when the Square share price was US$250 and was completed in late-January 2022 which by then saw the share price halved to US$120.
For the six months to December 2021, Afterpay recorded $645 million of total income, of which $78 million was attributable to late fees. Income was up 55 per cent and late fees 117 per cent, respectively, from $417 million and $36 million, in the six months to December 2020.
However, the company’s losses increased dramatically from $79 million in the December 2020 half-year to $345 million in the December 2021 half-year. This blow-out was largely attributable to bad debts from impairments of receivables which jumped by $105 million from $72 million to $177 million whilst marketing costs (+$69 million) and employment expenses (+$49 million) also contributed.
Meanwhile, ZIP announced their results for the March 2022 Quarter, and in the table below I have made a comparison with the December 2021 Quarter.
A$ |
December 2021 Quarter |
March 2021 Quarter |
Transaction Value |
2.60b |
2.02b (-22%) |
Customer Numbers |
9.9m |
11.4m (+15%) |
Transaction Value/ Customer |
$262.63 |
$177.19 (-33%) |
Merchants |
81,800 |
86,200 (+5%) |
Transaction Value/ Merchant |
$31,785 |
$23,434 (-26%) |
Revenue |
$167.4m |
$155.0 (-7%) |
Revenue/ Transaction Value |
6.4% |
7.7% |
It is worth noting:
- Credit losses for the March 2022 Quarter increased beyond managements’ target range.
- ZIP have cut $30 million from “people costs” and this should be effective from Fiscal 2023.
- Post the recent $172.7 million capital raising at $1.90 per share, ZIP has $327 million of cash on hand and undrawn credit. (Given the $212.5 million of cash on hand and undrawn credit at 31 December 2021, this implies a cash loss of $58m over the March 2022 Quarter).
- The acquisition of Sezzle Inc appears to be on track and management reinforced their view the potential cost and revenue synergies could be up to $130 million in Fiscal 2024.
- Management will be hoping for an accelerating path to profitability (post the Sezzle acquisition), or else available cash could be getting tight by Fiscal 2024.
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Ricky Leong
:
If inflation/interest rates continue to rise, this will undermine and may even destroy the business model of BNPL providers in different geographies.
Despite the signficant price falls, BNPL stocks remain very risky investments.
David Buckland
:
Agreed Ricky. The real issue is bad and doubtful debts could increasingly rear its ugly head, and given the Sector generally is some distance from being cashflow positive, they do remain risky investments.