Why are the Afterpay (APT) and Zip Co share prices stumbling?

Posted: 1 December 2021 1:12 pm

Shares in Australian BNPL providers are down 12-24% in the last month alone with the slump continuing today.

Buy now pay later operators Afterpay (ASX: APT) and Zip Co Ltd (ASX: Z1P) are among the top traded shares on the ASX, although on the losing side.

Afterpay was down 2%, Zip Co lost 3%, while even smaller player Sezzle (ASX: SZL) dropped over 3% at the time of writing.

Why are the Zip and Afterpay stock prices losing ground?

The tepid performance by the Australian BNPL operators comes after key global rival, Klarna, reported a stiff widening of losses for the January-September period.

The Sweden-based firm notched up a loss of 3.13 billion crowns (US$344.1 million) in the 9-month period, up from 801 million crowns a year ago. This was mainly due to net credit losses surging more than 80% to 2.9 billion crowns and growing administration expenses, as Klarna focused on driving up the value of transactions made using its payment platform.

The numbers underline reports about rising fraudulent activity and growing bad debts, as Klarna, like rivals Afterpay and Zip, looks to aggressively expand into the US and UK markets.

For instance, in the last 18 months alone, Zip Co has acquired US-based Quadpay, lifted stakes in UAE-based Spotii Holdings and Europe-focused Twisto Payments, launched in the UK, expanded operations into Canada, entered the high potential Indian market, and has gone live in Mexico.

Meanwhile, Afterpay has built a formidable presence in the US market, prompting its takeover by financial services and digital payments giant Square (NYSE: SQ).

Rising costs, competition

While BNPL operators may be playing the long game, analysts are worried about the near term rise in operating costs, and the jump in Klarna’s losses only underscores those concerns.

Zip Co reported a nearly 8-fold surge in marketing costs at the time of its full year results in August, and that trend is expected to continue in the current fiscal year too, which will have an impact on its bottom line.

Afterpay’s annual loss also blew out to $159.4 million from just $22.9 million the previous year, largely on account of its marketing costs more than doubling as the BNPL leader expanded into new markets to tap a pandemic-driven boom in demand.

This also comes amid rising competition in the BNPL market as more players look to take advantage of the rapidly growing industry, with global financial giant PayPal, tech leader Apple and Australia’s top lender CBA all announcing their own BNPL segment plans in recent months.

Analysts at Macquarie recently said there is likely to be industry overcapacity in the near term, which will be followed by a few years of pain for all players in the market.

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