The Motley Fool

Which buy-now, pay-later company should you invest in?

The Splitit Payments Ltd (ASX: SPT) share price has soared 223.7% since the new year, to a $1.23 close on Friday. Meanwhile, the Zip Co Ltd (ASX: Z1P) share price has doubled since the new year.

Are Splitit and Zip Co strong Afterpay competitors?

Those bullish on the Afterpay Touch Group Ltd (ASX: APT) share price may recognise competition rising in the buy-now-pay-later industry. Competitors like Zip Co and Splitit also offer similar interest-free models, gaining significant traction in the Australian stock market to date.

  • Afterpay: Up 110.8% YTD to $25.30 as of Friday.
  • Splitit: Up 223.7% to $1.23 YTD as of Friday.
  • Zip: Up 121.8% YTD to $2.40 YTD as of Friday.

On Afterpay

Afterpay allows users to pay for purchases over four instalments every fortnight interest-free. It does this by paying merchants up front and taking on the consumer’s credit risk allowing it to charge higher fees of 4% of the product’s value. Afterpay’s average product transaction value is $150 which targets lower-end apparel, though more recently it has expanded into other industries like health and travel.

Net income for Afterpay shot up 91% to 116.1 million in its HY as it processed $2.3 billion of underlying sales. This is up 147% from the prior comparative period (pcp).

On Splitit

The key difference between Splitit and Afterpay is that the company does not take on the risk of its customers being unable to pay. Rather, Splitit pays merchants monthly and requires consumers to have a valid debit or credit card and charges 1.5%. It offers longer payment terms from 2 to 36 months which can be selected by the customer. The company also targets different transactions. Splitit specialises in higher-end, higher-value purchases around the $1,000 mark such as travel and jewellery.

Splitit had revenues of US$790,000 for FY 2018, significantly lower than Afterpay and Zip.

On Zip Co

Zip is the intersection between the two financial products. Similar to Afterpay, consumers are extended a line of credit. However, Zip allows users to choose their preferred payment schedule. It offers two products – Zip Money (under $1,000) and Zip Pay (over $1,000) – which compete with Afterpay and Splitit respectively.

In its HY earnings call, Zip Co’s revenue shot up 114% compared to its pcp to $34.2 million. This was a result of a rise in its volume of
transactions by 110% to $495.2 million.

Foolish takeaway

If anything, highlighting the differences between these products show that the targeted niche is more distant than we thought. Dubbed as simply being ‘buy-now-pay-later products’, it’s easy to think each company that offers interest-free loans is just another Afterpay.

I’m bullish on the sector. On one side of the transaction, retailers can now reach customers it otherwise wouldn’t be able to. Similarly, users can now get their hands-on products where upfront costs may have barred them from enjoying them previously.

However, Afterpay is still a favourite of mine. It’s laid the trackwork for international success and made the right strategic partners. It has product-market fit and a reasonable 38x price-to-sales ratio, reflecting investor confidence in its share price. Zip Co has a 14x ratio, suggesting a more reasonable valuation with lower growth prospects. This makes it a more favourable long-term stock pick, while Splitit has operated for just 12 months and is still finding its niche.

Motley Fool contributor Audrey Thehamihardja has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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