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The market is going long on the Afterpay share price but shorting its weaker rival

It looks like nothing can touch our largest BNPL superstar as the Afterpay Ltd (ASX: APT) powers from one record high to another. But the bears are going after its smaller rival in a big way.

The death-defying Afterpay share price famously shot up from its COVID-19 market low of $8.90 back in March to $72.31 on Friday.

You might think that such a meteoric rise would bring out the short-sellers, but the opposite seems to have happened.

Afterpay beats the short-sellers

Short-sellers are those who are betting on a fall in the share price. They borrow stock to sell on market with the aim of buying it back at a lower price later to profit from the difference.

These traders were certainly active in Afterpay in the wake of the coronavirus pandemic but they seem to be largely wiped out by the unexpected eight-fold surge in this ASX tech darling.

Short-interest (the percentage of shares that’s shorted) was standing at around 5% during the darkest moments of the latest bear market. This dropped significantly to 1.26% in the latest ASIC as of July 6 (the data is always a week behind).

In fact, just in the last month alone, short-interest in Afterpay dipped 64 basis points (bps). But these bearish traders aren’t giving up the fight yet.

Short-sellers new ASX target

They are instead going after its weaker rivals as the buying frenzy in Afterpay infected all other ASX shares claiming to be in the BNPL (buy now, pay later) space.

The new favourite whipping boy for short-sellers is the FlexiGroup Limited (ASX: FXL) share price. Short-interest in the stock jumped a whopping 324 bps to 6.42% over the past month.

This is the largest increase of all ASX stocks and probably reflects the market’s scepticism about its ability to join in the frenzy.

For those who can remember, FlexiGroup and Thinksmart were the original “BNPL” companies long before anyone knew what those four letters meant.

The short and the long of it

Given that the proportion of FlexiGroup shares being shorted is still reasonably small compared to others like Myer Holdings Ltd (ASX: MYR) at over 12%, there is still room for short-sellers to step up the pressure.

If you are wondering about other BNPL stocks, short-sellers are also retreating from the Zip Co Ltd (ASX: Z1P) with short-interest in the stock falling 153 basis points to 5.6% in the past month.

The Splitit Ltd (ASX: SPT) share price also recorded a dip of 22 bps to 0.39% and the Sezzle Inc (ASX: SZL) is left unmolested by shorters.

Down but not out

However, don’t think short-sellers have lost the war. They may be in retreat now but I’m pretty sure they will be having another go as some experts believe the BNPL sector is a bubble.

If US tech megastar Tesla Inc (NASDAQ: TSLA) can face a record US$20 billion short position against it, Afterpay and friends should expect the naysayers to be back in force.

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Brendon Lau has no position in any of the stocks mentioned. Connect with me on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited and 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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