Why have the Afterpay (APT) and Zip share prices tumbled?

Posted: 5 January 2022 12:59 pm
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Afterpay-shares-05Jan_1800x1000_Finder

Shares in the 2 BNPL leaders are down 20-30% in the last 12 months.

Shares in buy now pay later operators Afterpay (ASX: APT) and Zip Co Ltd (ASX: Z1P) are among the most traded shares and also among the worst performers in early trading on Wednesday.

At the time of writing, Afterpay shares were down 4% at $80.51, while Zip Co had dropped 4% to $4.15.

Why are the Afterpay and Zip stock prices losing ground today?

The latest slide in the 2 BNPL market leaders comes on the back of heavy losses in technology shares on Wall Street overnight, which has led to the tech index being the worst-performing sector on the ASX on Wednesday.

Investors in the US market have been spooked by the impending release of the US Federal Reserve's minutes on Wednesday (Thursday morning AEDT) from its last meeting, which could outline the timing of the at least 3 interest rate hikes that the US central bank has promised for 2022 to control rising inflation.

Traders typically pile into tech stocks for growth when economic concerns are high, but often rotate into other sectors that are more closely aligned to the economy during periods of growth.

Australia’s tech stocks, including those of BNPL leaders Afterpay and Zip, normally track the sector’s movements on Wall Street and the weak investor sentiment has therefore flowed from the US market into our own bourse.

Sector concerns

Afterpay’s shares in particular are also directly linked to US digital payments giant Square (NYSE: SQ), now renamed Block, due to their impending US$29 billion (AUD$39 billion) merger.

Since Afterpay shareholders will receive a fixed ratio of 0.375 Block shares for every share they own, any falls in the Block share price reduces the value of the deal for Afterpay investors. Overnight, Block shares slid 4.7% to $156.33 amid the technology selloff, and Afterpay shares have performed in line with that.

The uncertain investor mood has also put a spotlight on the near term risks facing the sector. Afterpay and Zip Co are among the 5 BNPL businesses facing increased scrutiny of their business practices as part of a new inquiry by the US financial regulator.

Sentiment in the BNPL sector has also weakened amid a ramp up in competition, with global financial giant PayPal, tech leader Apple and Australia’s top lenders CBA and NAB all announcing their entry in recent months, promising overcapacity in the market.

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