Competition points to Afterpay slowdown in US

The battle for market share in the US buy now, pay later e-commerce sector appears to be catching up with the growth of industry trailblazer Afterpay, says new research that suggests competition is intensifying.

Afterpay's momentum in its key US market slowed dramatically in August, with US website visits up only 1 per cent on July, Citi Research shows.

The buy now, pay later group had 10.6 million visits to its US website in August, with unique visitors up 1 per cent month on month to about 4.3 million, Citi says. The slowdown is despite the Afterpay Day promotional sales day held August 20 and 21.

Afterpay shares closed 1.75 per cent lower at $72.58 on Monday and are 21.5 per cent lower since touching an August 25 high of $92.48.

Rising competition

Professional investors are also worried the entry of US payments giant PayPal into the buy now, pay later market will diminish Afterpay's US user growth and gross profit margins.

"The PayPal pay-in-4 product, however, will have some bearing on Afterpay’s medium-term growth ambitions," said Harry Dudley, a senior investment analyst at Watermark Funds Management.

Mr Dudley said PayPal's move had come sooner than expected, with its product also a closer than expected copycat of that offered by Afterpay.

"The key concern is also the price point for merchants, which looks to undercut Afterpay’s average margin of 4 per cent by a full 1 per cent," said Mr Dudley.

"The key determinant of Afterpay’s success in defending market share will be its ability to leverage its sale leads platform. It has proven successful at deterring competitors in the past as seen in its frequency of use.

"Afterpay’s customers who have been using the product for more than three years use it an average of 25 times a year. This is two to three times its competitors' customer usage."

Other players such as Zip Co, Splitit, and Sezzle have all plunged by double-digit percentages since August 31, when PayPal announced plans to launch a competing product in the final quarter of 2020.

In September, both National Australia Bank and Commonwealth Bank revealed plans to launch interest-free credit cards. CBA said its Neo Card would offer three credit limits of $1000, $2000, or $3000, with no interest or late fees in exchange for a fixed $12 to $22 a month.

However, Mr Dudley dismissed these plans as unlikely to hurt Afterpay's local market share.

"Interest-free credit cards are nothing new and unlikely to be felt by Afterpay in the Australian market given its dominance," he said. "Afterpay’s success has also been driven by an aversion for such products."

CBA has also invested $US200 million into Afterpay's biggest rival, Klarna, which launched in Australia in January.

US holds the key

Citi and other brokers, including Bell Potter and Morgan Stanley, have pinpointed the US as the key growth market for Afterpay in financial 2021.

Citi is forecasting the US market to contribute $5.2 billion of $8.4 billion in gross transaction value growth this financial year. It also forecast US customer numbers to nearly double from 5.6 million to 10 million, out of 16.4 million forecast globally.

The broker said its August internet data showed most buy now, pay later players continued to see growing site visits and app downloads.

Afterpay's Android-only mobile app downloads in the US increased 10 per cent month on month in August to around 350,000, but the result lagged Klarna, which posted 392,000 equivalent downloads.

Zip Co's acquisition QuadPay posted about 186,000 downloads.

Citi's $92.30 relative valuation on Afterpay shares places them on 36 times the broker's estimate of EBITDA in financial 2025.

Other brokers including Bell Potter and Morgan Stanley have aggressive 12-month share price targets of $96.70 and $101 respectively. These are largely based on assumptions that Afterpay will post blockbuster growth in the US.