Square has bet the future of “buy now, pay later” on Afterpay, buying it for $ 29 billion. Investors should spread their tokens around.
The deal sparked a wave of purchases not only in online payment carts, but also in the stock market. Shares of other so-called BNPL players, including Affirm Holdings and Zip Co., surged after the deal despite their giant competitor partnering with Square. The idea seemed to be that Square’s willingness to pay a premium for one of its peers shows that fears of the trivialization of installment payments are overblown and that the market overall is ready for huge growth.
As much as it sounds counterintuitive, there are certainly reasons to jump on the bandwagon. Not all BNPL providers do exactly the same: Affirm, for example, also offers larger, longer-term point-of-sale loans for larger purchases. Overall, BNPL probably accounts for less than 3% of e-commerce globally, and about half of BNPL users recently surveyed have used more than one service, according to payments research firm Strawhecker Group. It is therefore likely that volumes will continue to grow strongly. Additionally, based on the multiple of forward sales for which Afterpay was acquired, even at a relative discount, Affirm could still plausibly trade over $ 70 per share, according to Autonomous Research analyst Rob Wildhack, several dollars more than today.
There could also be interesting trades elsewhere. On the one hand, PayPal Holdings has slipped this month. Yet PayPal also offers installments through its payment button, and in a way competes with Square to provide payment services to merchants. But PayPal’s installments are already working in his wallet, so he doesn’t even necessarily require an additional purchase from the merchant to increase volumes further. If consumer awareness of BNPL grows widely, PayPal would most likely be a beneficiary.
Another sometimes Square competitor for merchants, Shopify, is also down in August. Here, too, Shopify would also likely be carried by a rising tide of BNPL as it offers payouts through its Shop Pay service. Notably, Affirm is its partner for smaller, shorter-term payment types that rival what Afterpay does.