Why is the Afterpay (APT) share price on the downslide?

Posted: 14 January 2022 12:43 pm
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Despite recent gains, shares in BNPL leader Afterpay are down 20% over the past month.

Investors in Australian buy now pay later (BNPL) giant Afterpay (ASX: APT), are seeing no change in their fortunes in the new year, with the stock continuing its downward slide.

Afterpay shares were the worst performers on the ASX on Friday, sliding 7.5% to a fresh 52-week low of $70.21.

Why is the Afterpay stock price continuing to lose ground?

Much of the Afterpay stock’s problems are related to issues with the sector.

Investor sentiment has suffered a meltdown as they come to terms with the headwinds facing the BNPL sector.

None of the key players are profitable yet and the situation is being made worse by the entry of financial and tech heavyweights ranging from PayPal and Apple, as well as Australia's Commonwealth Bank and NAB.

Adding to the pressures for the sector are regulatory scrutiny in some of the biggest markets, growing concerns among regulators of widespread fraud and bad debts in the sector.

The US Consumer Financial Protection Bureau (CFPB) last month opened a new inquiry into 5 BNPL businesses, including PayPal, Klarna, Affirm, Afterpay and Zip.

That has spooked investors, leading to BNPL stocks losing 20-30% of their market value in the last 2 months.

On Friday, sector stocks were again in decline, with Zip Co Ltd (ASX: Z1P) down 2.6%, Sezzle (ASX: SZL) losing 0.4% and Splitit (ASX: SPT) falling 3.8%.

Tech selloff

This has also come at a time when technology shares are seeing a selloff in global markets based on worries about the impending interest rate hikes from the US Federal Reserve, which has promised 3 increases in 2022 alone.

Traders typically pile into tech stocks for growth when economic concerns are high, but often shift to other sectors when interest rates climb amid periods of economic growth.

Afterpay’s fortunes, in particular, are linked directly to the sector after the announcement of its takeover by US payments giant Block (NYSE: SQ).

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 fell 5.9% to $136.95 amid weakness in technology stocks on Wall Street.

The stock has also been losing ground over the medium term.

Afterpay shares have performed in line with that, prompting the latest slide.

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