Is another boom in ASX BNPL stocks brewing? And how would Mk. 2 differ from Mk. 1

Is a new era on the horizon for ASX BNPL stocks? After a boom that lasted from Afterpay’s May 2016 IPO to its acquisition in the September quarter of CY21, there was a crunch in the sector.

Rising interest rates and inflation sent many companies – Openpay, Laybuy, Sezzle, Payright and Zebit just to name a few – out of business or into private hands. A handful managed to survive the crunch, particularly Afterpay which is now just a payment option in Block’s (ASX:SQ2) Cash App. Zip was another, and has rebounded substantially from its 2023 lows. Could this be a new boom for BNPL stocks?

Zip (ASX:ZIP) share price chart, log scale (Source: TradingView)

How another boom in ASX BNPL stocks would be different this time

It is said that the most dangerous words in investing are,’ It’s different this time’. But that doesn’t mean it is necessarily true all the time. Consider the dot com bubble that led to many companies collapsing. Not all of the winners were killed off, some survived, and those that did would emerge to become stronger than ever. Just ask Amazon.

Turning to the BNPL sector, just because many companies collapsed, it doesn’t mean people don’t need their services and won’t turn to an alternative. Nearly two in five Australians used a BNPL service in the six months leading up to March 2024, with Gen Z and Millennials being key users. Inflation has come off its all time highs, but remains sticky, and it is not as if many consumers’ pay has been increasing at the same rate.

The few stocks left in this space have seen this first hand. In the June quarter of 2024, Zip recorded $2.6bn in Transaction Volume and $223.6m in revenue, along with 6m active customers and 2.1m transacting users. 3 years ago, in the June quarter of 2021, $1.8bn in Transaction Volume, $129.9m in revenue and 7.3m ‘customer numbers’. The decline in customer numbers can be put down to the company’s divestment of its businesses outside Australia, New Zealand and the USA.

There are other BNPL stocks too

Zip is not the only BNPL company left, however. There is Block on the ASX, although investors no longer get a disclosure of how many users and revenue the Afterpay segment gets.

In the US, the most famous stock is Affirm (NDQ:AFRM). The biggest news out of the company has not been its results, but a partnership with Apple to integrate into Apple Pay. This partnership is early stage, but is notable because it came after a failed 12 month attempt by Apple to build its own product. So much for BNPL being a commodity anyone could copy, let alone do well. With 60m Apple Pay users in the US alone, there’s a big market to be tapped into. In the most recent fiscal quarter, Affirm made US$6.3bn in revenue (up 36%) and $576m in revenue (up 51%). Although its operating income was in the red, its -$161m loss was $149m better than 12 months before.

Another major company is Klarna. It was founded in Sweden and has amassed about 37m US users. It has long been an IPO candidate but has held off due to market conditions. Recent reports from the Financial Times have suggested it is talking to major investment banks for a 2025 listing. We will be fascinated to see its valuation. After all, it was valued at $46bn in 2021, but at only $6.7bn in a fundraising found in the very next year. But management must think it is only onwards and upwards from here if it is looking to list.

If it is a new era for the BNPL sector, it would be different (or maybe not)

If this is a new dawn for the BNPL sector, the sector would be dominated by a few larger companies that would derive benefit. But on reflection, this really isn’t much different than before. After all, the small caps like Openpay, Zebit, Splitit and Laybuy did nothing compared to Afterpay and Zip. At the same time, even the companies that survived are better businesses than they were during the pandemic.

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