After a face-ripping post-COVID rally in 2020, the ASX BNPL sector made the difficult transition from market darling to industry consolidation in 2021.

It resulted in a BNPL rollercoaster that finished on a down-ramp. Will the bearish sentiment hold sway heading into 2022?

Looking back at the year that was, the fortunes of market leader Afterpay (ASX:APT) acted as something of a bellwether for the broader sector.

BNPL 2021 timeline

February 11: APT shares top out at $160.05 (intraday) – a gain of ~1,900% from their March 2020 low as the BNPL frenzy reaches its zenith.

February 25: The company reports a 106% gain in half-year transaction volume to $9.8bn, and a $1.5bn debt financing deal. The stock fell by 11% to ~$119. Memorably, UBS said it was worth more like $30.

March 31: APT shares briefly fall below $100 following a +1 month slump. It follows the first round of post-COVID inflation fears in February, which saw bond yields spike and tech stocks sell off globally.

May 13: After gaining ground in April, more inflation jitters prompt a re-run of the February selloff. Following another strong US CPI print on May 12, BNPL cops a battering and APT falls to 2021 lows of ~$85.

July 14: More pressure on the sector — not from inflation this time but competition, as global payments giant PayPal and even tech leader Apple flag plans to launch similar pay-by-instalment offerings.

August 2: APT shares tread water near $100 through the middle of the year before the big play: Square Inc’s (now Block Inc) marquee all-share deal to buy the company at an indicative valuation of ~$126 per share.

December 13: As the Block Inc deal moves towards completion, APT shares increasingly start to trade in line with its soon-to-be new parent. APT shareholders vote in favour of the deal, which now only needs final clearance from the central bank of Spain (which Afterpay has flagged for the March quarter).

December 17: APT shares fall back to their May lows in the last big BNPL selloff of the year. Along with inflation and competition, this time it was a third headwind — regulation — as US regulators flagged plans to increase their scrutiny of BNPL products. The stock trades into Christmas back below $90, still a healthy +10x from its crisis lows but down ~50% from all-time highs.

The rollercoaster

The APT rollercoaster was reflected across the ASX BNPL space, except often with steeper falls.

Its second-largest competitor, Zip Co (ASX:Z1P), is trading at pre-Christmas levels just above $4. It’s fallen by around 70% from its highs above $14 in the halcyon days of February 2021. (Although UBS still values it at $5.20).

There were similar falls for the third-biggest competitor by market cap, Sezzle Inc (ASX:SZL), which at ~$3 has fallen by ~75% from its post-COVID highs when the stock ran from 40c to $11.99 — a gain of almost 3,000%.

Speaking of the halcyon days in February, Malaysia-focused BNPL player IOUPay (ASX:IOU) raised $50m from investors at 50c per share on February 18 to drive growth in the South-East Asian market. While it still has plenty of cash in the bank from that raise, the stock traded into Christmas at just 16c.

Fellow BNPL player Splitit (ASX:SPT) closed at $1.50 on January 27, two days before its shares came out of 24-month escrow following the company’s January 2019 listing. On February 9, founder Alon Feit sold 13.3m shares — $19.5m worth of stock — at $1.47. SPT shares traded into Christmas at… 25c.

‘Come to Jesus’

Heading into the Xmas break, Stockhead covered off on the year that was with pro tech investor Dean Fergie from Cyan Investment Management.

Known in local investment circles as an early spotter of Afterpay, Fergie flagged a notable shift in market sentiment over the last quarter of 2021.

While issues such as competition and regulation are often flagged as headwinds, Fergie said it has more to do with the analysis of company growth rates now the post-COVID volume surge has cooled off.

“My view is that a few months ago, the market basically said that a lot of these companies are still making significant losses. And we’re not going to continue to back them all forever if that’s the case,” Fergie said.

“And the momentum just fell out of the sector. You can’t specifically value a business that doesn’t make money. Then the momentum reverses and that’s why we saw significant falls across the board.”

That outlook for earnings growth isn’t just a BNPL problem. Fergie noted that even the biggest tech companies in the world — Apple, Amazon, Tesla et al — have faced some recent wobbles.

“Sooner or later there’s always that ‘come to Jesus’ moment investors say — what are we really prepared to pay for these business?”

“In this bull market, there was that element of ‘I don’t care, they’ll be worth more tomorrow than I’m paying today’. But eventually you’ve got to have a bit of rationality and think there’s an element of that slipping into market,” he said.

Summarising his bearish view, Fergie doesn’t think it’s necessarily a situation where falls of between 50-70% across the sector have given rise to some buying opportunities.

“My feeling is that just because they’ve fallen, it doesn’t mean it can’t happen again. That view of ‘they’ve fallen a long way and I’m not going to sell at these levels’ is a bit naive,” he said.

“In my opinion you’ve got to look at what these companies are valued at, what they’re potentially likely to earn, the headwinds from regulatory and credit risk and make an informed analysis.”

He used the example of Zip Co, which despite its fall is still a $2.5bn company by market cap.

“If you reference that against their customer numbers, my view is that you’re paying a lot per customer for a business at that valuation,” he said.

“Is $4 realistic? Maybe it’s $2, maybe it’s $8, I don’t know. But I think a lot of people are actually sitting down and having a good think about whether they need a chunk of their portfolio in these stocks.

“And the general consensus appears to be — maybe not. Maybe we’ll have a bit of a wait here and assess some of those sector risks.”