Why Afterpay’s share price jumped and Zip’s fell
The BNPL stocks took off after new product and partnership announcements with banking and credit firms.
- Afterpay's share price hit a new record high of $103.39
- Zip's share price jumped in the morning but fell sharply in the afternoon
- Afterpay is launching a new savings account with Westpac
- Zip has partnered with Visa to release a virtual card
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Update: On 21 October, Westpac said it plans to sell its 10.7% stake in Zip. The settlement is expected to take place on 26 October.
The APT share price rose more than 5% to reach a new high of $103.39 while Z1P's price jumped more than 3% in the morning session before dropping back in the afternoon.
In a sign that our buy now pay later (BNPL) sector is edging toward traditional banking, Afterpay announced the launch of a new savings account in partnership with Westpac before the market opened. Minutes later, Zip Co released its own ASX update of a new virtual card in collaboration with Visa.
The news will be a welcome reprieve for some after PayPal's new pay later product Pay in 4 cast speculation last month about whether Australia's smaller players could compete on the global arena, sending share prices crashing across the board.
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Afterpay dipping into banking
Last month we saw NAB and CBA enter the BNPL arena with new zero-interest credit cards. Now Afterpay is taking a step in the other direction by offering savings accounts and cash flow tools to customers in partnership with Westpac.
The new offering is set for release in 2021 and will be facilitated through Westpac's banking licence. This means that any money deposited into an Afterpay account will be held by Westpac.
There are few details about what these products will look like in terms of fees and rates; however, an ASX release today said it would allow customers to manage cash flow, pay bills, budget and withdraw cash.
Also read: Is Afterpay becoming a neobank?
Importantly, the announcement said the new offerings had the potential to bring in new revenue streams over time, although in which ways was not clear.
According to Bell Direct market analyst Jessica Amir, the move is a significant one for Afterpay.*
"With APT setting its sights on ruffling the feathers of the top 10 ASX companies, getting into banking is the only way APT can further expand," Amir told Finder.
"[They've] branched out from just being a unique credit offering BNPL business. This is unlike no other BNPL provider."
She says the big question here is whether Afterpay can make a similar case in bigger overseas markets.
"Offering this on the global stage could maybe take APT to a top 10 company in 6-12 months if it gained traction and further expanded APT’s cash flows."
Why did Zip's price fall?
Zip Co, Afterpay's main rival in the Australian market, is launching Tap & Zip, a virtual card that will allow Zip customers to shop anywhere that Visa is allowed.
This means that shoppers wishing to use a BNPL service will have the option to use Zip in most physical stores. The new virtual card can also be added to select digital wallets and is compatible with both Apple Pay and Google Pay starting from today.
That sounds like good news but the market didn't appear convinced by the afternoon. Despite the positive start to the day, Zip shares were in the red by 4pm Tuesday, closing -1.12%.
The price movement isn't surprising, according to Amir, who said the update is interesting but "not really a game changer."
"It’s a great announcement but it offers no point of difference...which is why its shares have not really shot the lights out," said Amir. "At the end of the day, other BNPLs offer Visa, Apple Pay and Google Pay. So for me, I don’t see it as a massive milestone."
As the biggest players in Australia's BNPL sector, Afterpay and Zip are perhaps in the strongest position against growing overseas competition.
Last month, BNPL share prices across the board, including Afterpay (APT), Zip Co (Z1P) and Sezzle (SZL), dove sharply after PayPal announced it was releasing a new pay-later product dubbed Pay in 4 overnight in the US. The news raised questions around whether Australia's comparatively smaller providers could compete in the key US or European markets.
Major analysts are surprisingly divided when it comes to the future of BNPL stocks, including Afterpay. The last price target by Macquarie set APT at $90 (on 9 October), contrasted to UBS at $28 and Bell Potter at $106.
Meanwhile, Morgans has a "buy" rating in place for Z1P with a target price of $9.77 as of 15 October, while Citi set a price of $6.55 as of yesterday, citing increased competition in the space.
From a technical perspective, the trends imply APT has further to run yet, according to Amir; however, she says investors should be aware of the risks. Among those risks are the RBA's pending review into the BNPL space and the expansion of PayPal into the BNPL space.
"Zip does not appear to be as bullish – consensus has Zip as a sell/underperform as it paved out growth into the US and it's not gaining the traction that it planned."
Meanwhile, UBS sees Zip's deal with Visa as "significant" (as posted by the Australian Financial Review) as it places the company in a better position should a "no surcharge" rule be imposed by regulators.
*Disclosure: Jessica Amir holds shares in Afterpay.