The Afterpay Touch Group Ltd (ASX: APT) share price is up around 185% year-to-date (YTD) with top brokers like Citibank estimating a bull target of $44.50 in FY22. It is growing rapidly in key markets like the United States (US) and the United Kingdom (UK).
But where does this leave rivals like Zip Co Ltd (ASX: Z1P) and Splitit Ltd (ASX: SPT)?
A closer look at the BNPL landscape
The danger for an investor is thinking the Afterpay tide will raise all buy-now, pay-later (BNPL) boats.
It's clear the BNPL payments method is definitely not a gimmick and is changing the way many, especially millennials, are paying for low-to-mid value products. But the Internet was also a revolutionary invention, yet did not guarantee every Internet company a safe and happy future. For every PayPal there were dozens of Pets.com.
Similarly, blockchain may well prove to be an impactful technological breakthrough, but it does not mean that every cryptocurrency will be a winner.
So, will there be any winners among Afterpay's rivals?
Splitit
Splitit's share price is currently up 34.2% YTD, but still down from its all-time high of $2.00 recorded in March.
Splitit closed yesterday's trade at $0.51, with a market capitalisation of $150.7 million but only US$798,000 in 1H19 revenue. In 1H19, Splitit made a net loss of US$3.8 million, up a steep 216% from previous corresponding period.
Splitit's revenue came from processing US$34.4 million worth of transactions. Its unique customers grew 228% to total 197,000 in 1H19.
Unlike Afterpay and Zip, Splitit lets customers pay in instalments with their existing debit or credit cards. This risks putting a lower cap on its user base compared to rivals, since most BNPL users are millennials, who are the least likely to own credit cards.
Further, credit card companies may well choose to roll out their own BNPL services, limiting Splitit's growth. Why allow Splitit to pocket merchant fees on purchases processed with their credit cards when they can collect those fees themselves? Visa is already one credit card company intending to enter the sector.
Indeed, in its prospectus, Splitit reported that its key growth strategy was pursuing a commercial partnership with Visa and MasterCard (it does not have any contractual arrangement with either MasterCard or Visa).
Therefore, Afterpay's recently announced partnership with Visa will be a big blow, and a sign the major players rate Afterpay above Splitit.
Zip
Zip is at the front of the chasing pack, with a significant share of the Australian market and a market capitalisation of $1.3 billion.
At the time of writing, Zip's share price is up a massive 243% year-to-date – dwarfing Splitit's 31% YTD growth – but still down 7.8% from its all-time high of $4.10.
Zip processed $1.1 billion in transactions in FY19 and reported 1.3 million active customers and over 16,000 partners (including Kmart and Big-W).
Comparison to Afterpay
In its first ever full-year results since its IPO, Afterpay processed $561.2 million worth of transactions, gained 1 million users, and secured 7,200 retail partners.
Even if Splitit triples its 1H19 active customers in FY19, it will be more than 400,000 customers short of Afterpay's first full-year tally.
As of 23 August this year, Afterpay has 35,300 active merchants and 5.2 million customers. It gained over 200,000 UK customers alone in the first 15 weeks of launching in that market.
For comparison, Splitit's total active customers as of 1H19 numbered 197,000. Not only that, this total was reached by operating in 27 countries.
Further, Zip's impressive 1.3 million users was 'only' an 80% increase from FY18. I say only because Afterpay saw its customers increase by 130% in its latest full-year results.
Additionally, Zip grew its merchant base by 54% in latest full-year results while Afterpay grew its merchant base by 101% in its latest full-year results.
This suggests that instead of Afterpay's growth maturing, its network effect is in fact compounding that growth.
Foolish takeaway
Afterpay's chasing pack must deal with the danger that Afterpay's large network effect will make it harder to continue incurring losses for the sake of growth. They may find themselves burning cash for a market share already taken by Afterpay.
This is why a global strategy will be vital. Splitit is aware of this, reporting that it operates in 27 countries already, while Zip has announced UK launch plans.
Not every investment has to be a six like Afterpay. You can run up a decent score with ones and twos. However, one shouldn't throw away their wicket for a risky single.
