Why has the Afterpay (APT) share price been sliding?

Posted: 30 December 2021 11:41 am
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Shares in BNPL market leader Afterpay have tumbled more than 22% over the past month.

For investors in Australian buy now pay later (BNPL) giant Afterpay (ASX: APT), 2021 has been a roller coaster year. From the highs of a takeover proposal by US digital payments giant Square to sliding to a 52-week low in December. On Thursday, the stock was again down 2.6% to $82.91 and has now lost more than 20% of its value in December alone.

What is weighing on the Afterpay stock price?

The ongoing slide in Afterpay’s stock price is related to its impending takeover by Square (NYSE: SQ), now renamed Block.

Afterpay’s shares have largely traded in line with Block’s stock price since both companies announced their blockbuster US$29 billion (AUD$39 billion) merger in August, which will be the largest in Australian corporate history.

Since Afterpay shareholders will receive a fixed ratio of 0.375 Block shares for every Afterpay share they own, any falls in the Block share price reduces the value of the deal for Afterpay investors.

Overnight, Block shares fell 1.2% to $161.85 amid weakness in technology stocks on Wall Street. The stock has also been losing ground over the longer term, and is now down 22.3% in the past month. Afterpay shares have performed in line with that and are down a near-identical almost 22% over the same period.

The 2 companies have faced numerous hurdles in completing their merger, with Afterpay earlier this month having to delay its shareholder meeting to vote on the deal because a subsidiary hadn’t received approval from Spain’s central bank.

The vote was subsequently completed and the companies still expect to complete the merger in the first quarter of 2022.

Sector outlook

Investors in the Australia-based BNPL leader have also had another reason to worry since it was listed among the 5 BNPL businesses facing increased scrutiny as part of a new inquiry by the US financial regulator.

The US Consumer Financial Protection Bureau (CFPB) earlier this month asked the 5 companies – PayPal, Klarna, Affirm, Afterpay and Zip – to provide information on their business practices, amid concerns that their financing products are putting consumers at risk.

Financial regulators have been especially worried about reports of rising fraudulent activity and growing bad debts in the sector. Sweden-based Klarna last month said losses ballooned 4-fold in the first 9 months of the year.

Meanwhile, sentiment in the BNPL sector has turned weaker amid a ramp up in competition.

Global financial giant PayPal, tech leader Apple and Australia’s top lenders CBA and NAB have all announced their entry into the sector in recent months, prompting analysts to warn that there will likely be industry overcapacity in the near term, followed by a few years of pain for all players in the market.

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