The investor exuberance sends a clear message. The sector is no longer focused on survival, its biggest players are focused on the potential to rival some of the biggest tech companies in the world. And investors are lapping it up as Zip Co. demonstrated with its recent plans to acquire the remainder of US-based buy now, pay later provider QuadPay.
Just as importantly, the company announced $200 million worth of funding from an arm of Susquehanna International – an early investor in TikTok parent Bytedance. The Zip share price shot up 80 per cent within days. Having started the year at $3.54 a share, Zip’s stock is currently trading at $6.16.
Zip co-founder Larry Diamond and QuadPay founders Adam Ezra and Brad Lindberg aren’t shy about their ambitions, citing the $US180 billion ($262 billion) US payments giant PayPal as the sort of potential they see for the merged company.
“For us, the resilience of the buy now, pay later sector has actually reinvigorated us as to the size of the opportunity. The US market is incredibly big and if we didn’t move now, we felt that we might lose out in an absolute land grab,” Mr Diamond said.
PayPal has hundreds of millions of customers, noted Mr Ezra. “There’s no reason we can’t build something similar over time.”
He also had some insights into why the US market is not proving to be a graveyard for BNPL providers. The quality of credit data means picking which new customer to back isn’t such a lottery.
‘The US market is incredibly big and if we didn’t move now, we felt that we might lose out in an absolute land grab.’
Zip co-founder Larry Diamond
“We’ve been fortunate that the credit bureau system in the US is far more mature than in other markets like Australia, so there is a lot of data we are capturing on the consumer by actually completing soft credit checks on all applicants,” he said.
And the short payment cycle, with its quick feedback loop is proving to be more beneficial than many imagined during the current downturn.
“It’s actually been surprising to see how it has all played out which has given us a lot more comfort around our thesis and how this product and model performs through down cycles,” said Mr Ezra.
Analysts are also happy to make comparisons between Afterpay and other payments giants.
Bell Potter recently drew parallels between Afterpay and Shopify, which became Canada’s most valuable listed stock last month by providing an e-commerce platform for retailers.
The broker noted the similarities in terms of the business model, but significant differences in valuation – like the fact that Afterpay trades on half the sales revenue to market cap multiple that Shopify does “despite having double the sales growth trajectory”.
BNPL also gives Afterpay a unique advantage in that it has close relationships with both its retail partners and consumers – something that Shopify and payment giants like Visa and Mastercard cannot match.
“This quick analysis helps highlight the context of Afterpay’s recent share price move, and supports our view that it isn’t excessive,” said Bell Potter’s Lafitani Sotiriou, who put a $65 price target on the stock.
“There is merit to that (Shopify) comparison,” said Tobias Yao, a portfolio manager with Afterpay investor Wilson Asset Management.
The big change is the sort of investors taking notice of the sector.
“The key catalyst for the entire industry more recently is Tencent’s investment in Afterpay. It has really put Afterpay and the BNPL space on the map globally in my view,” said Mr Yao.
“I wouldn’t be surprised to see more interest in the space from strategic investors offshore. What was previously a concept that started in Australia by Afterpay is now gaining traction globally.”
US investors agree. In its most recent newsletter to investors, New York-based Hayden Capital noted Afterpay’s attraction for US retailers looking to capitalise on their increased online traffic “with the higher order sizes and conversion rates that these partnerships provide.”
Hayden’s founder Fred Liu noted how the previous financial crisis accelerated the growth of Shopify, and the critical role that the 2003 SARS pandemic played in making China’s e-commerce giants like Alibaba what they are today.
“The habits that formed during a period of crisis, proved to be a permanent shift,” Mr Liu said.
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Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald’s deputy business editor and online business editor.