Why Afterpay (APT) and Zip share prices are plunging
Australian BNPL companies are a sea of red Monday following a US sell-off overnight.
- APT shares dropped more than 8% Tuesday, Zip fell more than 9%
- Concerns about rising interest rates fuelling BNPL sell-off
- Predicted rising rates also weighing on growth stocks
Shares in Australia's buy now pay later (BNPL) companies, including market darlings Afterpay and Zip Co, plunged Tuesday.
However, BNPL stocks aren't the only sector in the red Tuesday. Other Australian technology stocks are also down, including Wisetech, Appen, Altium and Xero.
It follows a broad technology sell off in the United States overnight, with the tech-heavy NASDAQ composite index dropping 1.5% Monday in its worst 1-day decline since March.
"Tech got smashed on Wall Street, and our tech sector has tended to follow US tech up and down," IG Markets Kyle Rodda explained.
Stocks in Facebook, Apple, Tesla and Amazon all fell between 1.4% and 4% in overnight trading in the US.
Why are BNPL stocks so impacted?
While many technology stocks are lower today, Australia's BNPL companies are especially impacted by the sell-off.
This mostly appears to have been sparked by growing concerns over inflationary pressures in the United States that could lead the Federal Reserve to lift interest rates.
Investors are waiting on the Fed to release the latest consumer price index (CPI) data on Wednesday.
If interest rates do go up, borrowing costs will increase and growth stocks (typically tech-oriented) tend to become less desirable.
Rising interest rates are also viewed as a key risk to the BNPL sector because they can reduce profit margins in some business models.
Afterpay CEO Anthony Eisen has been quick to dispute that idea, arguing that higher rates would make the BNPL model more attractive, according to the Australian Financial Review.
“If interest rates rise, that’s when our model becomes a competitive advantage. Even if interest rates doubled or tripled from this point, it wouldn’t be pervasive to our margin equation,” he said at the Macquarie Australia conference last week.
More broadly, a low-rate environment can make more speculative technology stocks like BNPL companies less attractive, while safer (cyclical) blue-chip stocks become more desirable.
However, IG's Rodda isn't so sure about the narrative.
"My feeling is we might be seeing some of the froth come out of the market."
Analysts also point to the growing competition in the BNPL space, particularly in the United States.
After PayPal announced a new "pay-later" product called "Pay in 4" last September, Afterpay's share price was sent tumbling 7% while Sezzle stocks dropped 20%.
With a market cap of US$229.5 billion, PayPal is a major rival for Australian firms to contend with. Afterpay sits at just $31.9 billion by comparison.
Analysts at Macquarie have pointed to the risk of industry overcapacity in the near term, which could result in a few years of pain for all players in the market.
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