The Openpay Group Ltd (ASX: OPY) debuted on the ASX on 16 December 2019. The company had an IPO price of $1.60 per share and a $150 million market capitalisation at the offer price.
Brokerage Shaw and Partners has initiated coverage on Openpay with a buy recommendation and price target of $2.25. Openpay shares are currently trading for $1.36 a piece, so this recommendation is speculative and high risk in nature but represents a significant 70% potential return.
What does Openpay do?
Openpay is a payments technology company that allows you to buy now, pay later (BNPL). It works in partnership with merchants to develop a wide variety of BNPL plans ranging from between 2 and 24 months in duration, and of values between $50 and $20,000.
Openpay has made an effort to differentiate itself from the likes competitors such as Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) by targeting certain segments such as consumer retail, healthcare, automotive and home improvement. This has allowed the platform to attract a comparatively older customer base.
A not-so-exciting ASX debut
Openpay had an extremely disappointing performance on the day of listing, with its share price closing at $1.30 which represented an almost 20% drop for those that participated in the offering. The share price continued to falter, hitting a low of $1.10 on the third day. Investors are clearly not very excited at the prospect of another BNPL player entering the already saturated market.
Openpay vs. competitors
If we compare Openpay against similar sized competitors such as Spiltit Ltd (ASX: SPT) and Sezzle Inc (ASX: SZL), Openpay has a higher gross merchandise value (GMV) and revenue.
As at Q4 2019 (to keep the time horizon consistent with Openpay's prospectus figures), Splitit had a market capitalisation of $168 million with 624 merchants and 235,000 active merchants. The company generated US$30.5 million in GMV that resulted in US$466,000 in revenue and a net loss of US$12.12 million. Alternatively, as at Q4, Sezzle had a market capitalisation of $186 million with 7,507 merchants and 644,509 active merchants. This generated US$68.8 million in GMV, revenues of US$3.6 million and a net loss of US$13.5 million.
Openpay's prospectus highlighted 1510 merchants and 133,566 active customers. This generated a GMV of $97.3 million, $11 million in revenue and a net loss of $14.7 million in FY19. From a pure valuation perspective, Openpay generates a much higher GMV and revenue at a cheaper market cap. Its net loss is slightly higher, but that's what the IPO was for – to buoy the company to continue to pursue growth opportunities.
Foolish takeaway
While Openpay might be on the path of redemption after a miserable ASX debut, I believe the Australian BNPL market is far too crowded for the company to succeed in the long run. Competitors such as Afterpay have already entered into sectors such as healthcare, automotive and home improvement. Openpay could rely on its performance in the UK to bolster its growth potential, but that region is still in its early days with a significant execution risk.
Afterpay and Zip pay are still my preferred BNPL players, as the smaller players will have to fight tooth and nail for market share.
