The only 2 profitable ASX BNPL players are merging. Now what?

Investors might be valuing profitability more heavily among BNPL shares now…

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Over the last few years, it has almost seemed as though ‘profitable‘ was a dirty word when discussing ASX buy now, pay later (BNPL) companies. However, that might be set to change as the sector struggles to gather the same hype that it once had, and competition continues to build.

Latitude and Humm deal puts emphasis on profits

Yesterday, Latitude Group Holdings Ltd (ASX: LFS) drew a figurative line in the sand with its $335 million offer to acquire the BNPL services business of Humm Group Ltd (ASX: HUM). The deal stands as a monument for valuing ASX BNPL shares on a more traditional basis.

For context, Block Inc (NYSE: SQ) (formerly Square) made its offer to acquire Afterpay Ltd (ASX: APT) last year, valuing the company at approximately 42 times its 2021 revenue. Whereas, the Latitude deal reflects a price-to-earnings (P/E) ratio of roughly 6 on Humm’s FY21 profits.

While Humm may not be growing at the same pace as some of its younger peers, the deal has reinvigorated doubts for the future profitability of other ASX BNPL shares.

Both Latitude and Humm are already producing considerable profits, which is ultimately what the end goal is for any investor. Meanwhile, larger names in the sector such as Afterpay and Zip Co Ltd (ASX: Z1P) are widening their losses as they fight for greater market share.

Here’s a quick comparison of earnings/losses among the big ASX BNPL players:

  • Afterpay: $156.3 million loss in FY21, widening from a $19.8 million loss in FY20
  • Zip: $658.8 million loss in FY21, widening from a $19.9 million loss in FY20
  • Latitude: $101 million profit (no comparable)
  • Humm: $57.1 million profit in FY21, increasing from $21 million in FY20

Point of difference to other ASX BNPL shares

Profitability isn’t the only difference Latitude can count against its competitors. In discussing the future of instalment payments, CEO Ahmed Fahour highlighted his belief that the company will benefit as regulation seeps into the BNPL sector.

At a minimum, they’re going to say this is credit, and you need to do a credit assessment. It’s no different to any other things. We believe that’s where it’s going to go.

Ahmed Fahour, Latitude CEO

The potential merging of Latitude and Humm comes at a time when the likes of Afterpay are touching 52-week lows. Fears of central banks lifting rates in the near future have put unprofitable growth shares under pressure.

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Motley Fool contributor Mitchell Lawler owns Afterpay Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns and has recommended Afterpay Limited and ZIPCOLTD FPO. The Motley Fool Australia owns and has recommended Afterpay Limited. The Motley Fool Australia has recommended Humm Group Limited. 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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