Are BNPL shares like Afterpay officially recession proof?

BNPL shares appear to be recession proof. ASX shares like Afterpay and Zip have seen customer numbers surge since the onset of the pandemic.

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The coronavirus pandemic has officially driven Australia into its first recession since 1990-91. But buy now, pay later (BNPL) shares such as Afterpay Ltd (ASX: APT) appear to be recession proof with growth in customer numbers and transactions surging since the onset of the pandemic. We take a look at how the ASX BNPL shares are outperforming on key metrics despite the economic turmoil. 

Customer numbers surge 

Each of the BNPL shares listed on the ASX has reported accelerating growth in customer numbers in 2020. Afterpay, the largest of the BNPL providers by market capitalisation, boasted 9.9 million customers at the end of FY20, a 116% increase on FY19. This included 5.6 million customers in the United States and 1 million customers in the United Kingdom, with remaining customers in the more mature Australian and New Zealand markets. 

Zip Co Ltd (ASX: Z1P), arguably Afterpay's fiercest Australian competitor, reported 2.1 million customers at 30 June 2020. This was a 63% increase year on year, with 197,000 customers added in the June quarter. Newer BNPL shares Splitit Ltd (ASX: SPT), Sezzle Inc (ASX: SZL), and Openpay Group Ltd (ASX: OPY) also saw strong growth in customer numbers. Splitit, which allows customers to split payments into interest-free monthly installments on existing credit or debit cards, reported total shoppers of 309,000 at the end of June 2020, an 85% increase year on year. 

Sezzle, which is focused on the North American market, saw record additions of customers in the June quarter, with customer numbers growing to 326,000. Openpay, which operates in Australia, the United Kingdom, and New Zealand, saw customer numbers grow to 319,000 in the June quarter, an increase of 141% on the prior corresponding period. 

Merchant numbers climb 

At the end of FY20, Afterpay was being offered by 55,400 merchants. Sezzle reported more than 16,000 merchants at 30 June 2020 with 3,397 merchants added during the quarter, well ahead of the company's prior record of 2,705 in 1Q20. Openpay grew active merchant numbers by 52% in the June quarter relative to the prior corresponding period, finishing the quarter with 2,162 merchants. Splitit, which processed its first transaction in 2017, listed on the ASX early in 2019 with 380 active merchants on its books across 27 countries. As at the end of June, more than 1,000 merchants were offering Splitit to customers. 

Transaction volumes leap 

Afterpay has seen transaction volumes processed using its platform surge 127% in 4Q FY20 to $3.8 billion. This brought full year underlying sales to $11.1 billion in FY20, up 112% on FY19. 

Competitor Zip Co recorded transaction volumes of $570.7 million in the June quarter (up 62% year on year). This brought annualised transaction volumes to $2.3 billion, above the $2.2 billion target. 

Splitit has also seen significant growth in transaction volumes, which surged in Q2 2020 to US$65.4 million, an increase of 176% quarter on quarter or 260% year on year. Sezzle reported underlying sales of US$188 million in the June quarter, a 57.5% increase quarter on quarter and 348.6% increase year on year. Openpay saw transaction volumes increase 119% in the June quarter, bringing full year volumes to $198.2 million, an increase of 98.2% compared to FY19. 

BNPL share prices follow 

ASX BNPL shares were heavily sold off in the March downturn. The falls were rapidly reversed as investors realised the durability of the BNPL business model and its applicability in the current economic environment. An increase in digital transacting has benefitted the BNPL providers that can assist merchants with cart conversion. An increased focus on budgeting due to the economic downturn has also increased the attractiveness of buy now, pay later solutions. 

The Afterpay share price fell to a low of $8.90 in March but has since soared to nearly $74, booking gains of over 730%. The Zip Co share price saw falls to as low as $1.18, but is currently trading at $6.16, a 422% recovery. The Sezzle share price was trading as low as 37 cents in March but is currently swapping hands at $7.59. This gives a phenomenal 1951% return to shareholders who got in at the low point. The Splitit share price is currently $1.39, but was as low as 22 cents in March, providing a 531% return. The Openpay share price dropped to 32 cents in March, but has since recovered to trade at $3.64, giving a 1038% return to the faithful that bought in at the bottom.

Global expansion on the cards 

Each of these BNPL shares is strongly focused on rapid expansion to gain market share. Afterpay is pursuing global expansion, planning to launch into Canada in Q1 FY21. Potential new markets have been identified which the company may seek to enter in 2020 or 2021. Zip Co is also looking to expand globally and recently purchased QuadPay which provides it with access to the world's largest retail market, the United States. Zip CEO, Larry Diamond says, "The credit card model is fundamentally broken with customers demanding flexible interest-free alternatives – the flight to BNPL is indeed a global trend."

Splitit has recently partnered with Visa and Mastercard with platform integrations progressing well. These partnerships are expected to accelerate card-based installments payments and result in increased merchant acceptance and transaction volumes. Openpay has been growing its UK business, securing a new debt facility to fund growth. Business in the UK has surged and initial trading under a major agreement with retailer JD Sports has been well above expectations. 

Sezzle recently raised nearly $80 million in capital to accelerate its growth strategy and strengthen the balance sheet. There was a strong response from shareholders to the capital raising, which resulted in allotments having to be scaled back. Funds will be used to invest in initiatives to drive long-term value creation. 

Foolish takeaway 

BNPL shares are weathering the COVID-19 storm and coming out on top. Customers are embracing flexible payment options and online transacting, fuelling growth in the market share of buy now, pay later providers regardless of recession. 

Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T 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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