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Stimulus end could challenge buy now, pay later’s rampant rally

However, a number also flagged risks for the company come September’s ‘fiscal cliff’ where the government is mooted to wind back its JobKeeper and JobSeeker stimulus packages, warning it could bring about a sharp spike in the number of customers unable to pay back their debts.

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Tobias Yao, fund manager at Afterpay shareholder Wilson Asset Management, believes the forthcoming “fiscal cliff” will be a significant test for the whole buy now, pay later sector, many of which have never piloted their businesses through an economic downturn.

“This is a very important juncture. Some of the biggest bear arguments for the buy now, pay later sector is that it’s never had to experience a recession,” he said.

“So if Afterpay can navigate the next three to six months without any meaningful spikes in bad debts it will lead to a further re-rate of the share price”.

Buy now, pay later operator Zip’s co-founder Peter Gray told The Age and the Sydney Morning Herald COVID-19 had proven the resilience of the company’s business model, though noted it would be keeping a close eye on things come September.

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“Zip is watching closely how September’s end of stimulus plays out, and we support any assistance the government might provide to those industries that need more help,” he said.

The potential removal of stimulus is less of a concern for Bronte Capital’s John Hempton, who is pessimistic about Afterpay and the broader sector, likening it to the late 90s dot com bubble.

The fund manager pointed to a notable quote from Sun Microsystems founder Scott McNealy to question why investors continued to back operators like Afterpay.

“Afterpay is about a third of the market capitalisation of Westpac, which is a huge institution with strong oligopoly power in the Australian market. Afterpay is a minnow, only 1 per cent of the size of Westpac, and subject to new and varied competition,” he said.

“What are you thinking?”

However, despite the potential short-term risks, analysts and investors are backing Afterpay for the long term, with Bell Potter analyst Lafitani Sotiriou comparing the technology company to US technology giant Shopify, which is valued at $US120 billion ($172 billion).

“At last check, Afterpay is growing its sales at around double the rate of Shopify, with Afterpay at over 100 per cent and Shopify at around 5 per cent,” the analyst said.

“This quick analysis helps highlight the context of Afterpay’s recent share price move, and supports our view that it isn’t excessive.”

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