What is weighing on the Block (SQ2) and Zip Co (Z1P) share prices?

Posted: 12 April 2022 12:44 pm
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Shares in most BNPL operators are down up to 90% in the last 12 months.

Shares of buy now pay later operators Block (ASX: SQ2), which owns Afterpay, and Zip Co Ltd (ASX: Z1P) are dragging the ASX indices on Tuesday, adding to the woes of the sector's long suffering investors. At the time of writing, the former was down 0.5% at $163.80, while the latter slid 4% to $1.34.

Sezzle (ASX: SZL) was down 3.2% and Splitit (ASX: SPT) up 1%.

Why is the SQ2 and Z1P stock price under pressure?

Some of the blame for the slide in the ASX-listed BNPL shares comes after yet another sell-down in technology stocks as investors worry about a faster-than-anticipated rise in interest rates around the world to control inflation.

But the latest decline comes after BNPL giant Afterpay revealed a blowout in losses for the first 6 months of its financial year, according to unaudited financial accounts released by US parent Block.

Afterpay's net income jumped from $374.2 million to $560.8 million in the half year to 31 December, but a surge in finance and marketing costs saw its net loss jump to $345.5 million, from just $79.2 million a year earlier.

The business also saw its employment expenses swell to $112 million for the 6-month period, from $62.6 million a year ago, while receivables jumped and expected losses from bad debts were up to $151.1 million, from $99.6 million.

Sector woes

Afterpay's numbers only underline the weak investor sentiment in BNPL stocks as they come to terms with the headwinds facing the sector.

None of the major players are profitable yet and the situation is being made worse by rising competition from the likes of PayPal, Apple and Australia's Commonwealth Bank even as the sector companies face rising regulatory scrutiny in some of their biggest markets.

A report by Citi seems to confirm the problems for the sector in the world's biggest retail market, the United States. Citi says US-based Affirm Holdings is outperforming its Australian peers in that country.

It said Afterpay's day of promotional sales failed to provide a "meaningful boost" to US and Australia businesses in March. Its website visits declined 12% year-on-year in March while US app downloads declined for the first time ever.

Zip Co also saw US website visits decline 80% year-on-year, and its total transaction volumes are forecast to also decline about 8% quarter-on-quarter. On the other hand, Affirm's US website visits are up 35% year-on-year, while app downloads jumped 53%, Citi says.

The situation has already prompted consolidation in the sector. Afterpay was acquired by Block in a mammoth $39 billion all-share deal last August. Zip Co is also acquiring smaller US-focused rival Sezzle in an all-stock deal.

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