The record revenue reported by Zip Co Ltd (ASX: Z1P) yesterday shines a light on arguably the most important metric when it comes to high-growth shares — revenue growth. Which beckons the question, how does Afterpay Ltd (ASX: APT) stack up against its peers on this measure?
Is the largest ASX-listed buy now, pay later (BNPL) player still competitive with its smaller competitors? Is Afterpay delivering growth at scale? Also, is Zip catching up?
Grow now, profits later
Although payment instalment options existed earlier, the BNPL sector really came to life in 2017. A simple, interest-free payment system in the palm of our hands began to resonate with a new generation of shoppers. Since then, instalment payments have exploded in supply and demand. In such a rapidly expanding market, growth has been the absolute focus of these companies — profits can wait.
Afterpay and its rivals are all competing to take as big of a chunk of the payment pie as possible. The main way to do this is to grow fast, faster than your competition. If you can win a customer and/or merchant before your competition, that's half the battle.
Let's have a look at each company's recent revenue growth:
|
ASX BNPL share |
Reported revenue (as of 31 December 2020) |
Year-on-Year revenue growth (as of 31 December 2020) |
|
|
Afterpay Ltd (ASX: APT) |
$670.9 million |
115.2% |
$36.16 billion |
|
Zip Co Ltd (ASX: Z1P) |
$247.7 million |
110.5% |
$4.60 billion |
|
Sezzle Inc (ASX: SZL) |
$58.8 million |
272.1% |
$913.3 million |
|
Splitit Ltd (ASX: SPT) |
$6.7 million |
309.2% |
$386.5 million |
|
Openpay Group Ltd (ASX: OPY) |
$23.2 million |
60.8% |
$225.9 million |
ASX Afterpay peers need to grow at scale
Straight away, we can see extreme growth occurring in smaller ASX-listed Afterpay peers. Splitit, for instance, notched up a 309% increase in its revenue year-over-year. However, its revenue is coming from a low base, at sub $10 million. This touches on the 'law of large numbers'.
The law of large numbers is demonstrated quite well here. The fundamental point of this law is that it's much easier to grow from a small number than a big number. For example, for Openpay to double its revenue, it would need to add another $23 million in revenue — not all too difficult. Whereas Afterpay would need to source a further $671 million in revenue — much more challenging.
We can see that both Zip and Afterpay have managed to more than double their revenue, despite being much larger than their peers. But an interesting difference between these two payment providers is scaling.
Growing and scaling are two different things. Growing is increasing revenue and resources at the same pace, while scaling is increasing revenue rapidly with resources increasing incrementally. To double revenue in the last year, Afterpay increased its losses by 35%. Meanwhile, Zip's losses increased by nearly 13 times. At face value, this would indicate that Zip is not scaling as effectively as Afterpay.
Foolish takeaway
Revenue growth is the prime focus for these companies. We can see that smaller ASX-listed Afterpay peers are increasing their revenue at a faster rate, but the law of large numbers will likely see that diminish longer term.
A likely contributor to Afterpay's share price and business success is its scaling. Although Zip is growing at phenomenal rates, the expense needed to grow will need to reduce over time to demonstrate scaling.
