Shares in the ASX buy now, pay later (BNPL) sector have come under immense pressure as the COVID-19 pandemic dashes consumer spending and confidence.
With many casual workers losing their jobs, the cost of financing increasing and retail sales declining, the spotlight has turned on the future of the BNPL sector. Investors are concerned how these companies will continue to profit given the underlying factors.
How have BNPL stocks performed?
Despite not releasing any news, the Afterpay Ltd (ASX: APT) share price tanked more than 33% yesterday. The sell-off has been attributed to nervous investors who are concerned about the company's future performance given the overall decline in consumer discretionary sectors. Overall the Afterpay share price has tanked more than 68% from its all time high in mid-February and is currently trading around $12.70.
The Zip Co Ltd (ASX: Z1P) share price is currently trading more than 70% lower after hitting $4.17 in February. Despite the company's share price tanking, Zip Co reported a 98% increase in revenue of $30 million for January and February. Last week, Zip Co released an announcement reporting that the company had not observed any material impact from COVID-19 and that its business continued to perform strongly.
An early warning
Last October, analysts from UBS released a bearish note on the BNPL sector, targeting the likes of Afterpay and Zip Co. Although the report was lodged a while back, the findings may explain why the share price of BNPL companies are getting smashed.
According to analysts, companies in the BNPL sector face increasing regulatory, competition and execution risks. Most concerning of all, analysts further noted the risk of the target demographics. According to UBS data, users of BNPL services are most likely to be indebted, with 64% of the users surveyed treating BNPL services as credit and 30% of users using credit cards to pay down their balance.
Should you buy?
In my opinion, when stocks are going down investors tend to conform to cognitive dissonance and stick with information that fits the narrative.
In the case of BNPL stocks, analysts that predicted a fall in share price now look like geniuses. However, in the broader scheme of things, all financial markets are being sold off as investors panic about the future.
In saying that, the BNPL sector does have to concern itself with consumer confidence and spending. I think that once the panic over COVID-19 subsides and consumer confidence returns, the sector will rebound.
