Can ASX BNPL companies like Afterpay (ASX:APT) compete with Paypal?

Shares in buy now, pay later (BNPL) companies like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) all soared to new all-time highs over the last year.

Afterpay, in particular, has grown from a media darling into a bona fide ASX behemoth. With a current market capitalisation of almost $32 billion, it is larger than both BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA).

From a low of just $8.01 twelve months ago, the Afterpay share price skyrocketed to $160 by February – a whopping gain of close to 1900%. Zip’s gains were almost as impressive, surging almost 1300% from a low of $1.05 in March 2020 to a new 52-week high of $14.53 by February. 

But the wind has gone out of their sails more recently. Volatility has returned to global markets as investors try to price in the continued impacts of the COVID-19 pandemic, and technology growth stocks have been hit particularly hard. There was also the recent announcement that US payments company Paypal Holdings Inc (NASDAQ: PYPL) is set to launch its own BNPL offering in Australia in June, in direct competition with both Afterpay and Zip.

Recent corrections

The Afterpay share price has plummeted over the last few weeks. Since hitting an all-time high price of $160.05 in early February, Afterpay shares have dropped almost 30% to $113.42. Zip shares have fared even worse, plunging 40% from their high of $14.53 to $8.59.

Sezzle Inc. (ASX: SZL), a US-based BNPL company, has also seen its share price plummet 30% from its February high price of $11.99 to $8.00. This might indicate that the drop in share price of both Afterpay and Zip is more to do with a general tech sector correction than concerns around Paypal’s Australia launch. Paypal’s BNPL service has been up and running in the US since last year.  

Recent financial performance of ASX BNPL companies

Afterpay released its first-half FY21 results to the market last month. In it, the company reported that $9.8 billion in sales had been processed through its platform during the six months ending 31 December 2020, an uplift of over 100% versus the first half of FY20.

Total income was up 89% year on year to $417.2 million, while earnings before interest, tax, depreciation and amortisation expenses (EBITDA), excluding foreign currency gains and losses, came in at $47.9 million, a jump of 521%.

Zip also released its first-half FY21 results last month. It was a record half for the company, with transaction volumes soaring 141% year on year to a little over $2.3 billion and total revenues up 130% to $160 million.

Zip also announced it was accelerating its US expansion plans after completing the acquisition of US-based BNPL provider Quadpay in the US in August 2020.   

Outlook for ASX BNPL companies

It is difficult to assess how much of an impact Paypal’s BNPL offering will have on the fortunes of both Afterpay and Zip.

Undoubtedly it will cause some disruption – Paypal’s offering is as cheap (if not cheaper) for consumers, and it is fully integrated into the company’s existing payment platform. This means it will roll out relatively seamlessly to all of Paypal’s 9 million Australian customer accounts.

However, it is worth remembering that both Afterpay and Zip are expanding into new international markets. North America and the United Kingdom were Afterpay’s fastest-growing segments in terms of underlying sales, active customers and active merchants for the first half of FY21. In fact, North America accounted for 43% of Afterpay’s underlying sales for the first half FY21.

This geographic diversification means it is less exposed to the threats posed by Paypal. It also shows that Afterpay has so far seen little negative impact on its US growth trajectory from Paypal’s BNPL product in the American market. Only time will tell if it can also shrug off the challenge in the domestic market.

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Rhys Brock owns shares of AFTERPAY T FPO, ZIPCOLTD FPO, Sezzle Inc, Commonwealth Bank of Australia and PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends PayPal Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. recommends Sezzle Inc and recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended PayPal Holdings and Sezzle Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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