We've had news today that WAAAX high-flyer, buy now, pay later (BNPL) pioneer and ASX growth market darling Afterpay Ltd (ASX: APT) has hit yet another record high. The Afterpay share price started trading today at $64.20 before reaching a new high of $67.34 (at the time of writing). It's now up nearly 130% year to date and around 740% off the lows we saw in March. Holy Macaroni!
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The Afterpay share price isn't alone
It's not just Afterpay that has been exploding in value in recent weeks. The entire BNPL sector has been on a tear. It seems to me (much like the dot-com bubble of the early 2000s) that all a company needs to do to attract a frenzy of investors is to have the word 'pay' in its company name or modus operandi.
Let's look at Zip Co Ltd (ASX: Z1P). Zip shares are up ~62% year to date and up 448% from their March lows.
Openpay Group Ltd (ASX: OPY)? Up nearly 85% year to date and 622% since March.
How about Splitit Ltd (ASX: SPT)? It's up 90.9% year to date and over 500% since its March lows
Pushpay Holdings Ltd (ASX: PPH)? Up 126% year to date and 269% since March.
Sezzle Inc (ASX: SZL) is up 157% year to date and more than 1,000% since March. Yowza!
You get the idea…
Are we in BNPL bubble territory?
Whenever I see numbers like these, I'll be honest and tell you that alarm bells ring for me. I can't conceivably accept that the real value of all these companies has doubled, tripled or more since March. Sure, the market may have tilted in the BNPL sector's favour with shifts to online shopping and 'cash flow management' of purchases as a result of the coronavirus pandemic. But these numbers are bordering on ridiculous for me.
And apparently, I'm not the only one. According to reporting in the Australian Financial Review (AFR) yesterday, fund manager Investors Mutual is also shunning the BNPL sector. The AFR quotes Investors Mutual senior portfolio manager Simon Conn:
"We've seen an increased level of retail activity in the market and there's not a lot of fundamental analysis going on but a lot of momentum. The small-cap market is particularly prone to fads and bubbles. You remember the dotcom boom, with stocks trading in excess of $1 billion with no profits and then falling apart."
Mr Conn references the Afterpay share price as well as those of Zip, Splitit, Sezzle and Openpay. He points out that, together, these companies have combined market capitalisations of over $20 billion, but not a dollar of profits between them. "There's very extreme valuations and a lot of risk in that sector," said Mr Conn.
It's hard to argue with cold, raw data like that.
Foolish takeaway
I think there is a lot of potential in the payments and buy now, pay later sector to be sure. We're moving towards a cashless society and these kinds of companies stand to benefit the most. But right now, there's no way I could regard the Afterpay share price, or any of the companies discussed above, as 'fairly valued'. I do think the market is getting a little bubbly and carried away with these shares, and I'll be sitting on the sidelines until things return to some semblance of rationality.
