It was only a few years ago that the concept of 'Buy Now Pay Later' didn’t exist. Today it is one of the buzzwords in the emerging companies segment of the ASX. From an almost standing start the four stocks being discussed today have amassed a combined market cap approaching $8 billion. The revenue figure, on the other hand, is materially less.
AfterPay Touch (ASX:APT) is the giant in the sector, however, Zip (ASX:Z1P), Splitit (ASX:SPT) and the reinvigorated FlexiGroup (ASX:FXL) are all chasing a share of this growing market.
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Ben Clark: Welcome to Buy Hold Sell. I'm Ben Clark. Joining me today we've got Oscar Oberg from WAM, Dave Allingham from Eley Griffiths. We're going to be talking about the buy now, pay later space which is red hot. There is debate raging in the market about what these companies, ultimately, could be worth.
Dave I'll start with you. Afterpay (ASX:APT), the giant in the room. $6 billion dollar market cap. Is it a buy?
David Allingham: We think it's still a buy. I know that's a very consensus view. It's been a consensus view from $2 though so I think that doesn't mean ... It doesn't derail the investment proposition. It's got the blue sky, it's got the multi geographies. These businesses are scale businesses. You need very large TTV to be able to generate economic returns. We think this one has the opportunity.
PayPal's capped at $170 billion Aussie. Afterpay's no PayPal but it just gives you some context for the scalability and opportunity globally that Afterpay has with, we think, the best management in the market.
Ben Clark: Yep. Okay. Oscar what's your view on this one? As punchy as Dave?
Oscar Oberg: It's a hold for us. Look, I've just been over to the United States. Spoken to quite a number of retailers over there. It's clear the product's getting a lot of traction and the momentum is really, really strong. Just on valuation it's a hold.
Ben Clark: Okay. Now the Splitit (ASX:SPT) just came on to the market, was up 800% in two months. Are you a buyer of this one?
Oscar Oberg: Look we're a hold. It's very speculative. It's very early stage. The business doesn't take credit risks, so it has the ability to scale globally quite quickly but look it's horrendously expensive. On a valuation call it's a hold.
Ben Clark: Okay.
Dave, what's your view on Splitit?
David Allingham: Look I only had a brief interaction with the company. I'm a sell at $250 million market cap. The guys are giving it a good go. It's innovative, it's new, it's different, it's global but they booked 500 grand of revenue, merchant revenue, in the most recent quarter. You're talking an enormous valuation for what it is today.
Ben Clark: Okay. Then we've got Zip (ASX:Z1P), which is the ... Morphed into the number two player in Australia but it's actually the one having the run at the moment. Is that a buy, hold or sell?
David Allingham: Look, I've got that as a sell too today. I think, credit to management, they've done a great job. They are the number two player in the market. They've announced Kmart yesterday. They're really gaining some traction. That's going to keep Afterpay's pricing honest, I think with the retailers. But look it's cashflow break-even at the moment, that's the best they've done. I think to justify $1.5 billion market cap, it's going to have to make a lot of profit. I just don't see the scalability in that business model, just in a domestic market.
Ben Clark: Yeah, yeah. What's your view on Zip Oscar?
Oscar Oberg: Yeah we're a sell as well. Look management's done a great job, as Dave said, but valuation's too high for us so it's a sell.
Ben Clark: Okay. Then FlexiGroup (ASX:FXL), which I think ironically actually created this whole concept, but it's been a terrible performer. Are you a buyer of FlexiGroup?
Oscar Oberg: We're a sell. I acknowledge it is looking very cheap. I guess they do say that they are the inventors of this space but they're really only pushing through and investing right now. We think they're behind the two top players.
In the meantime they've got a number of divisions that are going backwards. It's had a nice run but look in our view it's a sell.
Ben Clark: Okay. Dave what's your view? John Wylie's just put a whole lot of cash in there. He's pretty well regarded. Buy, hold or sell?
David Allingham: Well look it's been so tempting, FlexiGroup, for the last number of years. It's always looked cheap. I think we're finally seeing the catalyst for a re-rating in the stock, which is occurring. That is that there's a new strategic direction. There's a new CEO, Rebecca James, who seems competent. You've got John Wylie in there helping with strategic direction.
We think at 10 times earnings, with potential for some growth ... Oscar's right, there's some pressure points in the business but it looks just too cheap with us. With some momentum to the upside from a rating perspective, so buy.
Ben Clark: Okay. Well it looks like for now some of these are a sell now and buy later.
"It was only a few years ago that the concept of 'Buy Now Pay Later' didn’t exist." Really? Business credit has existed for hundred of years. Consumer credit at least as far back as when GMAC was formed in 1924 to finance car purchases. For as long as I can remember banks have been lending people money to buy homes. Not to mention there are about 1.5 billion credit cards on issue round the world, with which you can buy just about anything.
Flexigroup valuation is too cheap for the field it is in, its profit making trading at p/e of 10. Its mkt leader in NZ with very good new CEO. they already have relations with a lot of retailers like myer etc. rerate will occur on this one