The explosive post-COVID growth of ASX-listed BNPL stocks has created plenty of talking points among investors.

While retail hype and excess liquidity may be part of the equation, analysts are also debating whether the gains are tied to more fundamental shifts in consumer behaviour and payment patterns.

So far, the latter view appears to be holding sway. Afterpay (ASX:APT) closed yesterday above $90, Zip Co (ASX:Z1P) ripped higher again this week while Sezzle (ASX:SZL) hit an intra-day high of $11.83 yesterday — an eye-watering gain of 3,097 per cent from its March lows of 37c.

But as far as UBS is concerned, Afterpay — the first-mover and market leader — still looks far too expensive.


APT 12m price target: $28.25

Throughout the torrid rally in the BNPL sector, UBS has maintained a forward-looking 12-month price target on Afterpay of less than $30.

And following APT’s full-year results presentation yesterday, the bank’s latest valuation is $28.25 (up slightly from its previous forecast of $27).

At the crux of the UBS view is what it says is the implied revenue growth baked into Afterpay’s current share price.

In its FY20 results, Afterpay confirmed strong underlying sales growth of 112 per cent to $11.1bn. However, UBS said it would have to increase that by around 15x over the next five years to justify a valuation above $90.

“Our view on fundamental valuation remains unchanged: we think the current share price factors in over $170bn in underlying sales by FY25,” UBS said.

By that point though, UBS predicts Afterpay will only be generating around $51bn in sales.

Near-term, the bank said Afterpay’s recent capital raise left it well-funded to continue driving growth into FY21, where total underlying sales were forecast to rise by around 65 per cent to $18.4bn.

UBS expects over half of that new growth ($4.1bn) to come from the US market, and the $28.25 price target also includes a component totalling $5.70 for further international expansion outside of its current markets.

The bank’s valuation incorporates a cost of equity (the required rate of return implied for buying the stock) of 8.25 per cent, and a terminal growth rate (beyond 2030) of 2.5 per cent.


Risks of Afterpay’s success

In assessing Afterpay’s medium-term prospects, UBS also said the stock faced a “paradoxical” regulatory risk, where increased attention from regulators will eventuate as a by-product of the company’s success.

In particular, the bank highlighted the fact that Afterpay still wasn’t considered as a credit provider for regulatory purposes, but might be in the future.

The other risk it flagged is whether the company would be able to continue to forcibly prevent merchants from passing on the transaction cost to their customers. (The current state of play is that merchants accept a margin cut in return for more fostered sales and increased liquidity).

And perhaps not surprisingly (given the number of BNPL competitors in the local market), UBS said future sales growth could also be hampered by low barriers to entry in the sector.

“However, we acknowledge that Afterpay’s first-mover advantage in Aus/NZ has potentially created a moat in its home market,” UBS said.