For the past couple of years, buy now, pay later (BNPL) shares have been a great success story on the ASX.
Afterpay Ltd (ASX: APT) is now among the top 100 largest ASX companies with a market cap of over $7.7 billion, and is not alone. Zip Co Limited (ASX: Z1P) has reached a size of $1.38 billion, Flexigroup Limited (ASX: FXL) is almost $750 million and, behind them, there is a host of smaller players including Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT), and Openpay Group (ASX: OPY).
It is not an easy task to value businesses that are growing at rates close to 100%, while having no current earnings. Most of these companies are suffering large operating losses, which forces them to regularly raise capital just to stay afloat and pay their obligations as they fall due.
Afterpay
Afterpay is the largest and best-known company amongst the BNPL players and is currently raising $30 million in capital through a share purchase plan. The SPP was originally planned for June, but was put on hold while awaiting for an AUSTRAC audit report. Current shareholders will be able to purchase up to $15,000 in new shares at a price of $23 through the new share purchase plan.
Other investors can invest at the current share price of $29.61, which implies a price-to-sales ratio of 31.49 and a 1-year sales forecasted growth rate of 77%.
The good news is that analysts forecast Afterpay to reach profitability in 2020, with 7.7 cents per share in earnings, which implies a forward-looking price-to-earnings (P/E) ratio of about 380.
Zip
After raising $60 million from institutional investors in November, Zip has now just completed a further $10 million share placement at a price of $3.7 per share. By 27 December, Zip will report whether its share placement has been successful and fully subscribed.
Meanwhile, investors can snap up shares on the open market for $3.52, which implies a price to sales ratio of 13.53 and a 1-year sales forecasted growth rate of 91.1%.
Zip is also forecasted to reach profitability in 2021, with 3.9 cents per share in earnings, which implies a 2-year forward-looking P/E of 93.
Foolish takeaway
Overall, a positive sign for BNPL shares is that the road to profitability appears to be clearly ahead, as both Afterpay and Zip are currently forecasted to book a profit within the next couple of years.
At the same time, there are several headwinds on the horizon, including fierce competition, shareholders dilution, regulatory risk, and stretched valuations.
As such, as a matter of personal preference, I would hold off from investing in BNPL shares at these levels.
