Why the Afterpay (ASX:APT) share price fell 20% in March

Why increasing competition, an underperforming tech sector and broker concerns drove the Afterpay Ltd (ASX: APT) share price down 20% in March

the words buy now pay later on digital screen, afterpay share price

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The Afterpay Ltd (ASX: APT) share price has found itself in a rut this March. In particular, sliding ~20% to a four-month low of $101.50 on Wednesday. This also drags its year-to-date performance from a peak return of 33% to negative territory, or down 14.7%. 

At the time of writing, the Afterpay share price is trading for $103.26, up 1.77%. 

Why the Afterpay share price fell in March 

Tech shares falling out of fashion 

Rising bond yields took the spotlight in early March. Benchmark US Government bond yields had slowly crept back to pre-COVID levels, meaning they had more than tripled from August 2020 lows of 0.50% to more than 1.50% in March. 

Yields matter from a number of perspectives. Higher yields, or interest rates, translate to higher borrowing costs for individuals and businesses, which could curb economic activity. 

A higher interest rate could also see a shift away from riskier investments or sectors. Furthermore, moving into lower-risk assets such as bonds or value sectors.

From a valuation perspective, interest rates are also used to determine the fair value of a company. This would involve discounting its projected future cash flows to the present. A stock that is not yet profitable, such as Afterpay, relies on earnings that are in the distant future. A higher interest rate would reduce the value of future earnings. 

Rising yields have put pressure on richly valued tech shares, with the S&P/ASX Information Technology (INDEXASX: XIJ) falling 5.80% in March, compared to the flat ASX 200. 

Competition continues to intensify in the buy now pay later space 

With almost a dozen ASX-listed BNPL players, big banks and online payment giants fighting for market share, the BNPL sector is becoming an awfully crowded space

While Afterpay retains its position as BNPL king, increasing competition will likely dampen sentiment and growth expectations. 

Macquarie Group Ltd (ASX: MQG) sees near-term pain for the Afterpay share price 

In a Macquarie research report on 24 March, the broker highlights the bleak near-term outlook for the BNPL sector. 

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.

Where does the Afterpay share price go from here? 

Afterpay continues to be a pioneer in the BNPL industry, with recent moves into Southern Europe and a new banking app. The company is pushing ahead. However, the factors above could continue to put pressure on the Afterpay share price in the near-term. 

Motley Fool contributor Kerry Sun has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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