Where next for Afterpay (ASX:APT) and Zip (ASX:Z1P) shares?

Where next for the Afterpay Ltd (ASX:APT) share price and the Zip Co Ltd (ASX:Z1P) share price? Here’s what this broker thinks…

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The Afterpay Ltd (ASX: APT) share price and the Zip Co Ltd (ASX: Z1P) share price are both pushing higher on Wednesday morning.

At the time of writing, the buy now pay later (BNPL) providers’ shares are up 3% to $95.44 and 1% to $7.29, respectively. This is despite the release of a bearish broker note out of UBS this morning.

What did UBS say?

According to a note out of UBS, for Afterpay, its analysts have retained their sell rating but improved their incredibly low price target to $37.00. Based on the current Afterpay share price, this implies potential downside of 61% over the next 12 months.

The broker remains bearish on Afterpay due to its belief that its returns could be eroded by increasing competition. Particularly given the low barriers to entry in the BNPL market and the threat from payments giant PayPal.

And while it acknowledges that Afterpay’s product is popular with consumers and that management is executing well, it still feels its platform is easy to replicate.

Another negative that UBS believes the market is overlooking is the capital required to fuel its growth. It points out that PayPal is spending almost $3 billion on marketing compared to $100 million by Afterpay.

What about Zip?

For Zip, the broker has retained its sell rating but cut its price target by 17% to $5.60. Based on the latest Zip share price, this would mean downside of 23% over the next 12 months.

Once again, it feels increasing competition could be a problem and weigh on Zip’s margins. Particularly in the United States, where it believes its QuadPay business is enjoying higher margins than Afterpay.

It also suspects that a US bank could follow the lead of Commonwealth Bank of Australia (ASX: CBA) by entering the BNPL market.

And, as with Afterpay, it feels that the market underestimates the amount of capital required to support its growth, especially if competition increases.

It is, however, worth noting that UBS has been negative on the companies for some time, particularly Afterpay. And if you had followed their recommendations, you would have missed out on some incredible returns over the last couple of years.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. 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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