ASX buy now, pay later share market darling Afterpay Ltd (ASX: APT) has been hogging most of the media spotlight recently.
And not without cause – despite a gloomy economic outlook and collapsing consumer sentiment, its share price has skyrocketed almost 850% since March.
With a market cap nearing $20 billion, it is now bigger than ASX heavyweights like Ramsay Health Care Limited (ASX: RHC) and REA Group Ltd (ASX: REA).
But there are plenty of other companies that also operate in the ASX buy now, pay later space. Most of you have probably heard of Zip Co Ltd (ASX: Z1P). But what about Splitit Ltd (ASX: SPT), Sezzle Inc (ASX: SZL), Openpay Group Ltd (ASX: OPY) or FlexiGroup Limited (ASX: FXL)?
These companies have all been lighting up the market recently. Since March, FlexiGroup has gained more than 200%, Splitit shares are up close to 600%, Openpay has soared 1000%, and Sezzle shares have skyrocketed an astronomical 2000%!
These sorts of returns are difficult to ignore, so let's look at the driving forces behind these incredible gains.
We'll focus on the two ASX buy now, pay later companies that have delivered the strongest recent returns: Sezzle and Openpay.
Sezzle
Let's start with Sezzle. Like Afterpay, Sezzle gives consumers the ability to repay their purchases over 4 fortnightly instalments. Provided all instalments are paid on time, there are no interest or late fees charged to the customer – instead, Sezzle makes its money by charging a small fee to the merchant.
The reason you may not have heard too much about Sezzle is that it is headquartered in Minneapolis and predominantly targets the North American market. It has been growing rapidly in the US, driven by rising rates of online shopping spurred by COVID-19 lockdowns.
Sezzle reported cash receipts from customers for June of almost US $170 million, driven by record growth in both active customers and active merchants. The company is targeting US$1 billion in annualised underlying merchant sales by the end of this year.
Openpay
Openpay's point of difference from other ASX buy now, pay later companies is that it gives users the option to spread their repayments out over longer timeframes – ranging up to 24 months.
It has also reported record growth recently: active customers soared 145% higher year-on-year in July, while active merchants increased 48%. Revenues for the month came in at $2.1 million, a year-on-year uplift of 73%.
While its flexible repayment plans might be appealing to customers, it's a riskier business model for investors. Companies like Afterpay and Sezzle both turn over their receivables quickly (generally within 6 weeks), which promotes smaller purchases and leaves less time for a customer's credit to deteriorate.
This is reflected in the companies' differing net transaction losses. For July, Openpay estimated net bad debts to be 1.54% of total transaction volume, down from 2.89% in the fourth quarter FY20.
Compare this to Afterpay's estimated net transaction loss of just 0.55% of underlying sales for FY20. This will be a key metric to focus on if economic conditions worsen over the next 12 months.
