What's the outlook for ASX BNPL shares in FY23?

Could it be sell now, sell later for the sector?

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Key points

  • BNPL shares are struggling and look to face additional headwinds in FY23
  • Commentary on the sector is bleak and that's backed up by several BNPL shares booking losses of more than 90% in the past 12 months
  • The Zip/Sezzle merger breakdown also adds further pressure to the industry 

ASX BNPL shares had a shocker run last financial year with the sector incurring heavy losses. That downward momentum has continued in FY23, with the BNPL segment continuing to face multiple headwinds.

The latest news to shake the sector is the breakdown of the Zip Co Ltd (ASX: ZIP) and Sezzle Inc (ASX: SZL) merger, announced yesterday.

So what's ahead for this troubled sector? Let's check the outlook for FY23.

BNPL shares to face pressure this financial year

It certainly hasn't been a good start to the new financial year. Speaking to the Responsible Lending and Borrowing Summit in Sydney this week, federal Financial Services Minister Stephen Jones said the government was cracking down on the BNPL industry.

Jones said he would soon be consulting with industry stakeholders and regulators on how to improve credit regulation in Australia.

He also dismissed arguments that BNPL players aren't extending credit:

[L]et's have an end to the silly argument about whether BNPL is credit and get on with the next stage of growth for this emerging industry.

If it walks like a duck and quacks like a duck, it's a duck.

Meanwhile, Grant Halverson of banking and payments consultancy McLean Roche said Australia has "an enormous bubble" in its BNPL sector. That's certainly not bullish language.

Halverson told The Australian:

It's absolutely bizarre that the ASX has 12 listed BNPL stocks … and it is all built on this notion that you can borrow money forever and not pay for it.

I think in 12 months' time, you'll have two or three surviving; the rest will all be gone. They'll either go broke or they'll be bought very cheaply.

Indeed, on the back of Zip and Sezzle's failed merger, the Sezzle share price has plummeted, closing the day 21.57% lower at 20 cents a share.

While the Zip share price has fared better since the deal was called off, the ASX BNPL share is now set to face additional headwinds.

In a note to clients, UBS analyst Tom Beadle reiterated this point and said the move would "potentially crimp [Zip's] ability to turn a profit".

He said the UBS team was surprised by the announcement and that macroeconomic headwinds are also plaguing the BNPL sector's outlook.

Certainly, it appears the future is murky for BNPL shares such as Zip and Sezzle, but other players are on the slab too.

Whilst Zip has crashed 93.5% into oblivion, names such as Laybuy Group Holdings Ltd (ASX: LBY) and EML Payments Ltd (ASX: EML) are also down more than 91% and 71% in the past 12 months respectively.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended EML Payments and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended EML Payments. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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