After a horror year, what’s next for ASX BNPL shares in the new quarter?

ASX BNPL shares are putting in a mixed performance as we round out the second week of the new quarter (Q2 FY23).

After a difficult Q1, here’s how these four buy now, pay later stocks have performed so far in Q2 (since the closing bell on 30 September):

• Openpay Group Ltd (ASX: OPY) shares are up 5.6%
• Zip Co Ltd (ASX: ZIP) shares are down 8.0%
• Sezzle Inc (ASX: SZL) shares are flat
• Block Inc (ASX: SQ2) shares are up 5.6%

For some context, the All Ordinaries Index (ASX: XAO) is up 2.7% over this same period.

How have ASX BNPL shares performed heading into the new quarter?

ASX BNPL shares have had a year to forget, so far.

The companies’ share prices have all gotten absolutely hammered as investors awoke to the reality that inflation wasn’t transitory, and interest rates across most of the developed world were heading sharply higher.

After posting some truly phenomenal gains in the year-plus following the pandemic recovery trade (commencing late March 2020), things began to slow down for ASX BNPL shares by mid-2021.

As for 2022, here’s how the same four companies have performed to date, over a period that has seen the All Ordinaries tumble 13%:

• Openpay Group Ltd (ASX: OPY) shares are down 74.0%
• Zip Co Ltd (ASX: ZIP) shares are down 85.3%
• Sezzle Inc (ASX: SZL) shares are down 84.3%
• Block Inc (ASX: SQ2) shares are down 49.2%*

See what we mean by a year to forget.

(*Note, Block commenced trading on the ASX on 20 January this year following its successful acquisition of Afterpay.)

Well, those are the quarters gone by.

So, what’s next?

What to expect in the quarter ahead?

When talking about ASX BNPL shares, it’s important to remember we’re taking a broad-stroke approach to the sector here.

Each company has its own management team, different balance sheets, and its own specific market strengths, weaknesses, and potential growth outlook.

With that said, investors in ASX BNPL shares would do well to keep an eye on the outlook for inflation and any resulting rate hikes. Not just from the RBA here in Australia. But, even more importantly, from the US Federal Reserve.

As mentioned, the dismal share price performance of buy now, pay later companies over the first three quarters of the calendar year was largely driven by soaring inflation and hawkish tightening from central banks across much of the world.

ASX BNPL shares are more vulnerable to rising interest rates than many stocks for several reasons.

First, many of them have high debt levels. And as rates rise, the cost of servicing that debt rises as well.

Second, higher rates (and inflation) put greater pressure on their customer base. Sure, a greater number of cash-strapped customers may be tempted to use BNPL services to delay paying for their purchases. But the BNPL companies can expect the number of clients who fail to make those repayments also rise alongside the tougher economic environment.

And third, ASX BNPL shares are largely priced based on forecast future revenues. Those revenues may indeed eventuate. But higher interest rates increase the present cost of those future earnings.

With that in mind, tomorrow’s Consumer Price Index (CPI) figures due out of the US should offer some early indication as to the outlook for these companies in Q2.

If inflation in the world’s top economy comes in below consensus expectations, ASX BNPL shares should receive some welcome tailwinds amid hopes of a less hawkish Fed.

The post After a horror year, what’s next for ASX BNPL shares in the new quarter? appeared first on The Motley Fool Australia.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc. and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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