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Zip, Afterpay: Are buy now, pay later companies in the buy zone?

·3-min read
A logo for the companies Afterpay and Zip is seen in a shop window.
Afterpay and Zip have lost more than half their value since July 2021. (Source: Reuters)

Tech stocks, payment stocks and buy now, pay later (BNPL) stocks such as Afterpay - owned by Block Inc. (SQ2) - and Zip Co (Z1P) have been smashed by the market of late as the spectre of numerous interest rate rises, especially in the US, looms.

This raises the question: are these stocks destined to be low-priced, out-of-favour shares or will there be a rotation out of currently popular stocks in other sectors - such as commodities, energy and financials - back into these BNPL and tech stocks?

Also by Peter Switzer:

If this is likely, a long-term investor might consider accumulating these ahead of that rotation.

Let’s start by looking at what the analysts surveyed by FNArena said about payments stocks.

Table showing information about payment stocks.
(Source: supplied)

What is clear is that these payments companies are liked by analysts - who are paid to assess these businesses - but they are out of step with what the stock market is thinking about these companies now.

And that’s the important point, now might not be good for these companies’ share prices, but could it change in the future?

The expert company watchers say “yes” but undoubtedly it will take time and patience to cash in on these stocks.

Payments companies are out of favour worldwide as this chart of the world’s most famous payments company - PayPal (PYPL) - shows.

Prior to the coronavirus crash of the stock market, PayPal was a US$122 stock. With the global lockdowns, it dropped to US$86.

However, as the lockdown world went wild, buying online payments companies such as PayPal, Visa and so on became very popular, along with other BNPL businesses.

PayPal peaked out at about US$308 in July 2021 and is now US$103 - a 66 per cent smashing.

At the same time, a company like Zip is down from US$8.30 in July last year to US$1.25 now, which is an 84 per cent collapse.

In early 2021, Zip’s share price was just over US$12, so the question is simply this: have these stocks been over-smashed and should we expect a comeback?

The local company analysts say “yes”. Even if their percentage guesses can be questioned, the belief that the share price is currently too low is very apparent.

And the same applies to US analysts when assessing PayPal and Block Inc. (which now owns Afterpay).

This is the view from CNN: “The 43 analysts offering 12-month price forecasts for PayPal Holdings Inc have a median target of US$174.00, with a high estimate of US$245.00 and a low estimate of US$105.00.

“The median estimate represents a +70.77 per cent increase from the last price of US$101.89.”

Graph showing information about payment stocks.
(Source: supplied)

This is the take from CNN’s survey of analysts on Block Inc. (SQ2): “The 41 analysts offering 12-month price forecasts for Block Inc have a median target of US$175.00, with a high estimate of US$240.00 and a low estimate of US$110.00.

“The median estimate represents a 46.63 per cent increase from the last price of US$119.35.”

Graph showing information about payment stocks.
(Source: supplied)

So, the experts like payments companies going forward but it’s bound to be a waiting game for the patient.

Looking back at the PayPal chart, does the current sell-off look overdone?

The current share price is US$103 for PayPal, which is below its pre-pandemic price of US$120.

This is despite the pandemic escalating the online-purchasing world and the company seriously entering the BNPL space in July last year.

What the market is saying is that this innovation of PayPal’s - going into BNPL “big time” - has had no material impact on its future business and profits.

The analysts don’t believe that.

Neither do I, but we will have to be patient until the market sees it our way.

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