New call-to-action


See all


What Buy Now, Pay Later Means for Investors

Stuart Lucy

Stuart Lucy is an Investment Specialist at the Australian Stock Report, and has gained exposure to funds management and investment banking throughout his career. He draws on this experience to provide macroeconomic commentary and actionable investment insights to clients. Stuart is responsible for writing reports, is involved in delivering Macrovue webinars and provides general advice to our members on portfolio construction. Stuart currently holds RG146 General and Securities qualifications.

The buy now, pay later space has been an incredibly attractive growth opportunity for ASX investors, with some companies turning a $10,000 investment at IPO into more than $250k. Companies in that space generally offer consumers the prospect of repaying purchases in equal instalments with no interest, and instead charge the merchants a fee that is expressed as a percentage of sales volume.

The reason why merchants will pay a middleman, is that the option to pay later at their store makes it more attractive to consumers who spend a high percentage of their income and live paycheque to paycheque. If you have $150 in your bank account and are looking to buy a $300 belt, it is much more palatable to repay the purchase in four equal instalments of $75 than one payment of $300, which would require going into credit card debt. Many customers of buy now, pay later providers do not want the force of compound interest working against them through credit card debt, and are thus more open to the prospect of eliminating their debt in predictable interest free instalments. By stopping consumers getting into significant amounts of credit card debt and helping merchants increase their sales, buy now, pay later platforms have rapidly increased in popularity amongst both groups.

Different companies have different models, which help them target particular niches within the space. While Afterpay will offer a standard repayment period of four equal fortnightly instalments, to align payment with the salaries of workers, other companies will offer payment periods of up to 36 months. As the sector is very new, only time will tell how successful the different approaches will be. As such, it is worth at least considering a few different stocks on the ASX if you are interested in investing in the industry.

Key stocks

Pay later - report 1

Afterpay share price chart (Credit: Bloomberg)

Afterpay has been by far the most successful company at executing its strategy in Australia’s rapidly expanding buy now, pay later space. The company had strong annual results this year, achieving sales growth of 140% across their business. This result was marginally ahead of Zip Co’s (ASX: Z1P) 108% revenue growth, further increasing their dominance within the industry. Nevertheless, since Afterpay is already worth significantly more than competitors, this is not a reason to choose the company as your buy now, pay later investment since their successful execution is already in the price.

Since the market has been rapidly following their US expansion strategy, it is worth noting that their US business grew revenue by 6447%. This figure is not quite as great as it may seem however, since the business was not operational in the United States for all of FY18. Nevertheless, recording almost a billion dollars of sales so soon is still a noteworthy achievement. Their maiden result included $5.6m of sales in the UK, a figure that was held down by the fact that they only recently entered the UK market through their acquisition of ClearPay. The company has also signed a high-profile partnership with Visa, which will help them achieve the growth that they are targeting in the market. Overall revenue for the company came in at $264.1m, as compared with Zip Co’s $84.2m result. Revenue includes merchant fees and will only be a small percentage of the total sales that are processed through Afterpay’s platform.

One concern of Afterpay bears is the company’s difficulty in monetising their product offering. They have achieved a high level of penetration in the Australian market but are still yet to turn a profit, despite being valued at $7.71bn. While this keeps many investors away, it is important to recognise that at 90% yoy growth, their ANZ business is nowhere near maturity despite being the oldest part of their offering. The other main concern is the level of bad debts in the business. While their level of bad debts is low and fell significantly on the result due to a growing base of customers with a strong repayment history, bears worry this could rise sharply in a recession. This factor explains a large proportion of volatility in the company’s share price, but it remains to be seen whether that volatility is justified.

Pay later -report 2

Zip Co share price chart (Credit: Bloomberg)

Zip Co has been successfully growing its buy now pay later offering in the Australian market, which caused the share price to rally 195% over the past year. The share price rise is partially reflective of the company’s ability to maintain revenue growth of 108% despite their increased size, which highlights the success that the management team has had in improving the company’s growth profile.

The company has $84.2m in revenue and has recently achieved positive cash EBITDA. The ability to turn a profit has concerned some analysts of the buy now, pay later space, who fear that a market share grab will make it hard for companies to monetise their customer base. Unlike Afterpay however, Zip Co also provides longer term loans for which it does charge interest. This means that one part of its business has competitors that are profitable, meaning that profitability is less of a long-term concern for Zip.

One recent development in the business driving the rally is their acquisition of PartPay. The PartPay acquisition will help the company diversify into new geographies like the UK, US and South Africa, giving Zip easy access to the company’s base of more than a hundred thousand customers. International expansion was the main driver of Afterpay’s (ASX: APT) rally from $5 to over $25 today, so it is clear why investors are excited about the development.

Having started much earlier, Afterpay has a head start on Zip Co in offshore markets, so it remains to be seen how quickly Zip Co gains traction. If it does however, the potential for a multiple re-rate is appetising. Investors who are confident in Zip Co’s management and their ability to execute on the company’s international expansion strategy would do well to keep the business on their watchlist.

Pay later - report 3

Splitit share price chart (Credit: Bloomberg)

Splitit (ASX: SPT) is a new entrant that has been trying to get a share of the action within the industry, pitching their model as offering a unique value proposition separate to Afterpay. They rallied strongly on the IPO as investors priced them on multiples which suggested that they had a big chance of being the next Afterpay. As investor expectations moderated, the company sold off from $2 to 42c, much closer to their IPO price.

The firm touts their high approval rates and opportunity to split purchases into 36 interest-free monthly payments (compared for four quarterly payments with APT) as differentiating factors for the platform. They also offer a 90-day trial period with products purchased on the platform, before payments commence, to attract consumers.

Bears would however argue that the difference between the business models of Splitit and Afterpay make the product much harder to monetise. Charging merchants a fee of 6% is a great business model if your initial capital is returned over 5 weeks (the average of four fortnightly instalments), since the return on capital is 80%p.a. assuming minimal friction and no defaults from the client. While both of these are big asks, an average repayment period of 18 months reduces the return on capital from Splitit’s 36-month repayment plan to 4%p.a. Any customer defaults and friction between payments reduce this return even further.

Another larger competitor Splitit will have to contend with is Klarna. Klarna offers the opportunity to repay a purchase in four equal instalments, a model used successfully by Afterpay to turbocharge customer growth. The company is the most valuable fintech start-up in the EU (CNBC) and is pushing for growth in the US and Australia, markets that Afterpay is trying to dominate. The firm’s recent equity raise will give them greater ammunition to compete with Afterpay, setting the two companies on a race to dominate the rapidly growing US buy now pay later market. While some investors claim that Afterpay’s AI based credit models and data build-up create a network effect that allows the firm to reduce pricing over the long term, other firms may be able to do the same while the market is in its infancy.

Splitit is one of the smallest companies in the ASX buy now, pay later space, so bulls argue that the business has the most room to grow. While this is true, many new industries have come to be dominated by a few players, particularly if network effects are important. Investors in the sector need to balance up both of these factors before deciding whether Splitit or one of the incumbents have more potential.


While many investors are attracted to the buy now, pay later space, some bears believe that the rapid growth has resulted in a market share grab that reduces the ability of top companies to gain market share. This is reflected by the fact that even Afterpay, by far the largest buy now, pay later company, has yet to turn cash flow positive. As investors in Qantas early this decade will know, price wars are almost invariably mutually destructive, and represent a cause for concern within the industry.

Another risk with the sector is increased competition. Zip Co, FlexiGroup (ASX: FXL), Afterpay and Splitit are all competing in the buy now, pay later space and represent a significant competitive threat to each other. While competition will usually be constrained by investor demands for profits and dividends, the buy now, pay later space offers such a wide growth opportunity that the market will reward loss making companies for their sky-high revenue growth.

The prevailing view amongst investors in the sector is that the industry can support a few core businesses, which will develop competitive advantages from having a large amount of customer data from which credit models can be continually improved. The companies that are the most efficient at this process will be more attractive to merchants, given they can reduce fees through minimising losses arising from customer defaults.

Another risk in the sector arises from bad debts. Companies that are in the buy now, pay later space typically attract consumers by not requiring the same checks that providers of credit cards require customers to go through. One example is early on in Afterpay’s journey, when the company was under the spotlight after a teenager signed a Visa gift card to Afterpay and bought alcohol (illegal for someone of his age). The alcohol was worth much more than the gift card’s value, meaning that the debt was unlikely to ever be repaid. This highlighted a weakness of their model, where consumers who should never be lent money are allowed to take large amounts of debt, which is almost unquestioned by consumers.

Other Rapidly Growing Companies

While the buy now, pay later space could be attractive to a lot of investors, there are plenty of other attractive growth opportunities. This is especially the case offshore, where growth companies are, on balance, much cheaper than they are on the ASX.

Being able to access the other 98% of global markets opens entire industries and thematic factors that simply are not for sale on the ASX. One example is 5G Networks, a technology enabling the introduction of autonomous cars and IoT devices. This tech is set to transform the global economy over the next decade. We just don’t have companies at the cutting edge of developing 5G in Australia. Telstra faces more competition with 5G than it did with 4G, which doesn’t bode well for the telco giant, given the completion of its 4G rollout was followed by a multi-year share price slide.

The S&P 500 has quadrupled since the financial crisis, where our own market has barely doubled. This makes a massive difference to the long term returns of investors and occurred while the Australian economy was enjoying a golden 30 years of economic growth. To make matters worse, most Aussie investors invested in BHP, RIO and the big 4 banks. Most of these investors barely moved over the past 10 years, where someone who bet $350k on the US market and did nothing else would have been sitting on over a million dollars in profits. The market has changed, and the wealth building multi-baggers of the future may not be the blue-chip stocks of today.

There are also opportunities to purchase stocks at far more attractive valuations; high dividend stocks internationally often yield over 10% with growing earnings. This is particularly true in Europe, where a decade of stagnation and concerns over EU stability has dented stock market performance. The WAAAX stocks provide Aussie investors with sky high rates of growth, but trade at some of the highest multiples awarded to any growth companies in the world. This is because there are so few growth companies in Australia, that Aussie investors who are unable to invest offshore must pay much higher multiples for growth.


Typical issues which Aussie investors have with investing offshore include a more limited knowledge of companies outside, sky high brokerage costs at the major brokers and not knowing where to start. We side-step these issues through developing a platform called Macrovue, where a top performing fund manager identifies attractive international investment opportunities for us to look at. We pay $15 a trade for brokerage and have a clear direction on which economic trends we are investing in. As one of the only platforms offering managed portfolios without a management fee, it’s worth looking at a couple of the themes we are looking at. The portfolios each have several stocks that investors can pick and choose if they wish:

Luxury goods (+4.82% LTM): Luxury goods producers have high profit margins and sticky customer bases, making them excellent long-term investments. They are particularly well positioned to take advantage of growth in China, given the high levels of luxury goods expenditure amongst the nation’s booming middle and upper class. Many of the companies in this view have significant family ownership stakes, including Hermes and LVMH, protecting them from short term biases in decision making.

5G Wireless Technology (32.65% LTM): 5G technology is the driving force enabling most of the game changing technologies over the next decade, from autonomous cars to smart homes. With most of the US and Europe poised to roll out 5G technology over the next few years, companies exposed to this trend are expected to see massive revenue growth.




This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)

(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).

This article is provided for informational purpose only and does not purport to contain all matters relevant to any particular investment or financial instrument. Any market commentary in this communication is not intended to constitute “research” as defined by applicable regulations. Whilst information published on or accessed via this website is believed to be reliable, as far as permitted by law we make no representations as to its ongoing availability, accuracy or completeness. Any quotes or prices used herein are current at the time of preparation. This document and its contents are proprietary information and products of our firm and may not be reproduced or otherwise disseminated in whole or in part without our written consent unless required to by judicial or administrative proceeding. The ultimate decision to proceed with any transaction rests solely with you. We are not acting as your advisor in relation to any information contained herein. Any projections are estimates only and may not be realised in the future.

ASR has no position in any of the stocks mentioned.

New call-to-action