The Afterpay Ltd (ASX: APT) share price is making up for lost ground after an underwhelming performance this year. Its shares are up more than 15% in April, bringing it back to break-even territory for year-to-date returns.
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Why the Afterpay share price was sold off in February and March
The buy now pay later (BNPL) sector broadly topped out in early February. Just before a majority of companies announced half-year results. Whether the earlier moves had already priced solid results or perhaps a 'buy the rumor and sell the news' narrative was taking place. Either way, Afterpay's half-year results were not well received by the market. Its shares fell more than ~10% on the day to a 1 1/2 month low of $119.50.
Negative factors continued to weigh the Afterpay share price in March. This included surging bond yields that typically have a negative impact on richly valued shares including tech.
To add further insult to injury, the Commonwealth Bank of Australia (ASX: CBA) announced its entry into the Australian BNPL market. Big brokers were quick to react to the news, with UBS retaining its sell rating and $36.00 target price. Macquarie also released a detailed report on 24 March. The report maps a 10-year flight path for the sector including key inflection points and triggers.
A key highlight from the report was the near-term pain it expects the industry to undergo, before emerging stronger in the medium to long term.
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.
Morgan Stanley bullish on Afterpay
Morgan Stanley is the first big broker to provide an update for Afterpay shares in April. The broker has assessed the entry of CBA into the Australian BNPL market.
CBA will attempt to become the preferred BNPL partner for merchants, charging them a significantly lower fee compared to Afterpay. The broker believes that this will result in a more competitive pricing landscape in Australia. This will translate to lower Australian merchant fee estimates for Afterpay.
Despite a more competitive pricing environment, the broker believes that Afterpay will maintain a premium to other payment methods. While its fees might be high for a payment solution, it is still relatively low for the marketplace.
Morgan Stanley reduced the group's merchant margins by 13 basis points for FY23 estimates and Australian merchant margins by 60 basis points. It reduced its target price from $159 to $149, but retained an overweight rating. Afterpay shares opened higher on Thursday, currently trading at $120.28, up 1.5%.
