The buy now pay later (BNPL) sector has been all the craze the last few months and seems to be showing no signs of slowing down at all. Everyone wished they bought Afterpay in March 2020 when it was trading at $10 per share but who would have predicted the $90 price per share a few months later??
Afterpay’s business proposition is simple. A consumer checks out online using the platform, Afterpay pays the retailer the full amount minus fees which varies between 3% to 6% and the consumer then pays Afterpay the full amount back in 4 equal instalments every 2 weeks. There are fees of course when the consumer fails to pay the amount back within the agreed time. This is essentially the old lay-by system made new.
Competitors obviously started getting into the space in the form of Zip Money, Humm, Openpay, Sezzle, Klarna and so on. I am betting by this time next year, there will be another 10 players entering the market! Competition will be huge in this space and there will not be enough room to accomodate everyone at the end. This will be the survival of the biggest and fittest!
This business is an absolute capital growth stock with no hopes of dividends ever in sight in my opinion. With such narrow margins, BNPL companies will continually need to raise cash through the issue of new stocks, stock splits, more debt or a combination of the three in order to keep growing their presence.
There is however a relatively small BNPL company that has caught my eye. It is called Splitit (SPT). It currently trades at $1.83 per share and has lots of potential to grow in my opinion. Most of the other BNPL companies have very similar business models. It will vary in terms of fees, payment duration but not all that different.
Splitit’s offering however is quite different.
Splitit is currently the ONLY BNPL provider to allow shoppers to use their existing credit cards to purchase items online with the added flexibility of making repayments over a time period that can be set by the consumer. You can “split” the payments. Get it?
For example, if I bought a $6,000 mattress online with the traditional credit card, you would normally want to pay the full amount back within 55 days or the following month. The cost of not doing so would be a compounding painful 20% interest on the amount owing slap in the face each month.
With Splitit, you can choose to repay the $6,000 amount over 6 months at $1,000 per month without any additional interest. The amount that you owe would simply be just “blocked” from your credit card and “released” once payments have been received. So let’s say if you had a $10,000 limit on your card, $6,000 would be blocked and your new limit would be $4,000 until you start making repayments on that $6,000 mattress.
Splitit currently have deals in place with Visa, Mastercard, Stripe and are in the process of adding more merchants and retailers. Their target market is currently in the US, Europe and UK which could be the reason why many in Australia have not heard of them before but I believe this is about to change soon.
As a consumer, this means I can now buy that big ticket item that I’ve wanted for awhile say a new handbag or bicycle, get all the reward points on my existing credit card and pay it down over a longer time frame so I can manage my cash flow better without paying any interest. This will encourage more frequent bigger ticket purchases in my opinion.
So what sets Splitit apart?
They are the only BNPL provider that allows instalments on credit cards at the point of sale.
They are NOT providing credit as they are using the existing credit available in credit cards already issued under the Responsible lending guidelines which credit card companies have to comply with. This is so important as this means Splitit will have NO regulatory risk should governments decide to step in and regulate the sector. Afterpay denies that it is a credit provider but how long can this continue? If it acts like a duck, quacks like a duck, should it be called a duck??
Splitit is very scalable as it is tapping into an already established consumer base with credit cards. This means they can grow very quickly and faster than its competitors with lesser capital outlay.
The most recent year on year second quarter update in July 2020 is already showing very positive signs with increased Merchant Sales Volume of 260% to $65M, increased gross profit of 460% to $2.4M with increasing shoppers and merchants on their books. Will they be able to keep up this momentum?
There is $1.8B plus of credit cards globally where 70% of credit is not utilised. So this roughly equates to a $1.2B opportunity. At 25% penetration, this means a potential $300M of merchant sales which translates to about $9M in gross revenue. This could translate to a share price of $9 per share at this point based on current market valuations.
With Merchant Sales Volume of $65M currently for the quarter, there is still plenty of potential left in this stock.
What do you think about this stock? Please feel free to comment below. Thank you.
Money Melbourne 