Macquarie Group Ltd (ASX: MQG) has come out with bleak commentary for the buy now, pay later industry. Its analysts have mapped a 10-year flightpath for the sector, highlighting leading indicators, inflection points and key triggers.
It believes that Afterpay Ltd (ASX: APT) will face industry consolidation headwinds in the near-term, before a better long-term outlook. The broker has retained a neutral rating with a $120 target for the Afterpay share price.
At the time of writing, Afterpay shares are up 0.3%, trading at $107.46.
"Pain before gain"
Macquarie expects the near-term to be a "pain before gain" scenario for the Afterpay share price. Its report studies other industries that have experienced a boom-bust cycle that resulted in the industry emerging healthier in the long-term.
The report observes trends such as China's autos share price index that increased rapidly from 2016-2018 due to growing wealth levels and government stimulus. 2018 was also when the index logged its first year of negative growth since 1990, with factors such as emerging electric vehicles creating a significant oversupply.
After a two-year consolidation period between 2018 to 2020, the market experienced a significant rebound to return to levels prior to oversupply. Similar trends are observed in China's cement share price index and the more recent resurgence of lithium prices.
Looking at the BNPL industry, the Macquarie report said:
The BNPL industry has seen explosive growth in the past few years and quickly gained popularity as a payment alternative, but as with many other such trends experienced in the past (China Commodities in 2015, China Autos in 2018), we think an excessive number of participants has entered the industry in the near term resulting in industry overcapacity.
We expect this to be followed by a few years of industry consolidation (i.e. pain for all players) before industry normalisation at a healthier supply/demand equilibrium.
What does the long-run look like for the Afterpay share price?
Macquarie has described the "pain before gain" scenario as a period that typically lasts for 1-2 years, followed by a year or so of recovery before prices eventually return to levels prior to oversupply.
As for the Afterpay share price, the broker is positive on its long-term outlook and bullish on its recent expansion into Europe. However, acknowledges the near-term pressure the industry is likely to experience.
Over time, the broker believes that "the strong become stronger and the weak get weaker". The consolidation period could see weaker companies either fading out or being acquired by larger BNPL companies.
