The old joke about investing in China, with its limitless opportunities for profitless growth, does not apply to buy now, pay later (BNPL).
It is just as well investors do not have to care about anything as old economy as a profit. The only thing more astounding than Afterpay and Zip’s soaring revenue and customer numbers on Wednesday were the continental-sized losses they are generating.
Afterpay’s losses blew out to $159.4 million compared to just $22.9 million the prior year.
Afterpay – which is being acquired by Square for $39 billion in stock – posted revenue growth of 78 per cent to $924.7 million for the 2021 financial year, while its losses blew out to $159.4 million compared to just $22.9 million the prior year.
Meanwhile, Zip’s revenue jumped 150 per cent to $403.2 million, while its losses ballooned to $653 million, compared to the $19.9 million of red ink the prior year.
The first important point both companies would probably make is that the losses do not reflect a sudden collapse in the economics of their businesses. Assuming that term can apply to businesses which have never made a profit.
Afterpay’s net transaction margin – i.e. the difference between the amount it receives from retailers for funding the sale and the cost of providing the service – declined 17 basis points to 2.06 per cent. It is hardly a killer, even if it does represent rising bad debts from customers who couldn’t pay their shopping bill.
A far bigger cost for Afterpay was the cost of its global expansion, and more importantly, the huge paper costs of providing shares to employees and share options issued to the vendors of its UK operation.
Afterpay had to acquire ClearPay in the UK because it was already up against a Dutch group using the Afterpay brand. The options issued to the former owners of the ClearPay brand increased in value, adding $97 million to Afterpay’s costs.
Share-based payments to staff added another $59 million to costs.
Over at Zip, the most significant expense item for the year was recognising the cost of acquiring the rest of US-based Quadpay. Writing off the Quadpay brand cost $42.6 million and the acquisition itself put a $306 million hole in the bottom line.
RBC Capital Markets analyst Chami Ratnapala was among those flagging a miss on underlying earnings at Afterpay due to the rising proportion of bad debts as it expands into new markets.
But she says the metrics that matter the most to BNPL watchers are headed in the right direction – like the growing frequency of use by Afterpay customers.
“All the key metrics are heading north, and data points which stood out were earlier customer cohorts transacting 34 times per year (compared with 29 times previously) and average 12-month frequency across all customers at more than 17 times (up 13 per cent on the prior year) in ANZ,” says Ratnapala.
The big concern, according to Wilsons Equity Research, is the flattening customer growth in the US.
“Our earnings estimates are currently under review. We note that North America Net Customer Additions in Q3′21 and Q4′21 are flat, suggesting our initial 2022 financial year estimates may be too bullish,” says Wilsons Ross Barrows.
Likewise, Jarden’s Elise Kennedy is focused on Zip’s expansion rather than the bottom line.
“We believe investors should focus on the near-term revenue growth opportunity, with the first-mover typically achieving better sustainable long-term margins in market maturity,” she says.
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