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Afterpay and other BNPL share prices plunge 75% from February

Stock exchange market display screen board on the street showing stock market crash sell-off in red colour

Why is the market so scared of buy now pay later companies right now?

The Afterpay Day sales have arrived, slashing prices across a glamorous range of fashion, travel and clothing deals.

Afterpay (APT) shares are also on sale today, having fallen more than 75% in the last month, dragging over $11 billion out of Afterpay's market cap.

Other buy now pay later (BNPL) company share prices have haemorrhaged at a similar rate, with Zip Co, Flexigroup and Open Pay share prices all experiencing equivalent drops of their own.

Few businesses have been spared from the ASX bloodbath, but BNPL companies have been among the hardest hit.

Sign of the times

Are the markets being overly dramatic?

More than 75% of Afterpay's underlying sales are online rather than in-person transactions, and in a statement last Friday the company said:

"We are well prepared to respond to any changes in customer repayment behaviour, however, we have not seen any changes relative to past performance."

In a letter to shareholders today, Afterpay also downplayed the credit risk, noting that the average Afterpay transaction value was $150, the average outstanding user balance was $250 and the service could not be used by customers with one overdue payment.

At the same time, it says it has over $400 million cash on hand and over $1.09 billion of warehouse facilities in place, only 33.3% drawn on.

"We believe the appeal of Afterpay as a disciplined budgeting tool will not be diminished and may be enhanced with changing market conditions," it said.

"We are unaware of any information, outside of the current uncertainty in the market generally, that would have precipitated recent share price performance."

And yet

Andrew Mitchell, senior portfolio manager with Afterpay investor Ophir Asset Management, suggested that that the sharp plunge may have been a reflection of the extra uncertainty faced by Afterpay's core millennial userbase in coming months.

"The falls for buy-now-pay-later versus traditional financials have likely been steeper as reduced consumer demand and higher unemployment would likely be focused in younger millennials who make up a disproportionate share of the retail workforce and buy-now-pay-later users," he said.

Beyond that, the scale of this drop may reflect previously-aired concerns about the potential role of BNPL companies in bad debt cycles.

If the impending economic slowdown airs bad debts, BNPL companies could find their business models back in the spotlight.

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