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Is the run over for BNPL unicorns like Afterpay and Zip?

The buy now, pay later (BNPL) market darlings of the ASX200 are feeling the heat of downgrades, valuation criticism and poor sentiment, with the Afterpay Touch Group Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) share prices falling by more than 20% in the past 2 weeks.

Why are BNPL shares under pressure?

Firstly, there appears to be a subtle change in the attitude for equities, globally. There are some signs the market is transitioning away from high growth and high valuation stocks, to a more traditional, value-driven approach. This follows the dramatic failed WeWork IPO, and fallout for tech IPOs.

Back at home, many market darlings such as the A2 Milk Company Ltd (ASX: A2M), Nearmap Ltd (ASX: NEA) and Altium Ltd (ASX: ALU) would have traditionally bounced off their current price levels if the market had a bigger appetite for high growth and expensive shares. I believe this transition from growth to value will see the larger BNPL players, namely Afterpay and Zip, struggle to make meaningful share price gains.

Secondly, Zip Co provided the market with a Q1 FY20 update on 30 October. In a market that is becoming increasingly attentive to valuation, Zip’s numbers were within expectation, at best. The company highlighted that its quarterly revenues had increased 15% on prior quarter, quarterly transaction volumes up 111% year on year and customer numbers increased to over 1.4 million, with 147,000 added in the quarter.

At face value, the company is doing great, but the market was not impressed by the update – the Zip share price slid by more than 10% on the day of the announcement. Perhaps sign of an attitude adjustment that a company’s share price shouldn’t be doubling every few months on the back of a decent result.

What now for BNPL shares?

Surprisingly, it’s Afterpay and Zip being hit the hardest. Smaller BNPL players such as Sezzle Inc (ASX: SZL) and Splitit Ltd (ASX: SPT) are holding up much better. Both Sezzle and Splitit have a market capitalisation of just over $200 million. I believe because of their size, speculative nature and growth capabilities, the market hasn’t written them off yet.

For example, Splitit is the only BNPL that offers instalment payments on credit cards. Any consumer with a Visa, Mastercard or Union Pay card can use Splitit today, providing a significant advantage to scale its platform globally.

Likewise, Sezzle’s instalment payment solution become newly available to online businesses through Visa’s CyberSource payment management platform, opening the company up to over 400,000 CyberSource users worldwide.

Foolish takeaway

Only time will tell if the market is able to move on from this new valuation-driven approach. Afterpay and Zip Co are still outstanding growth stories, but maybe the good old days of triple digit returns are a thing of the past.

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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has recommended Sezzle Inc. 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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