Investors who backed BNPL (buy now, pay later) stocks in March have made anywhere from 10x to 20x their money in 2020.

When a sector runs that hot, it stands to reason that projected growth rates ascribed by the market will come under increased scrutiny.

And among sell-side research analysts, UBS has established itself as one of the resident bears in the marketplace.

For example, Afterpay (ASX:APT) is currently trading above $100 — UBS says it’s worth less than $30. The bank thinks Zip Co (ASX:Z1P) is overvalued too (but not as badly).

Within that framework, the UBS equities team has taken another deep dive on the sector in the form of a 1,000-person survey (second annual edition).

For starters, they said 40 per cent of respondents had used a BNPL service in the last 12 months.

That’s higher than the bank expected (and if extrapolated for the population would be much higher than BNPL’s current use rate).

“Survey responses should be interpreted with this in mind,” UBS said.

In that context, interesting insights from the survey included:

  • Awareness of BNPL has increased significantly, with 85pc of non-users being aware of the sector, compared to 26pc in 2019
  • The “vast majority” (64pc) of BNPL users view the service as credit
  • Afterpay remains the most popular platform, with 69pc of respondents using the service. (Zip Co was second with 39pc, with daylight to third).
  • When asked how BNPL companies make money, only 20pc of respondents answered correctly (Answer: through merchant fees)
  • Two thirds of Afterpay users said they wouldn’t use the service if on-charged the 4pc merchant fee currently paid by vendors

On that last point, UBS said it lends weight to one of the factors that underpin its bearish BNPL view: regulatory risk.

Currently, Afterpay is able to legally enforce a no-surcharge rule on vendor clients, effectively banning them from passing the cost onto consumers.

“As no-surcharge rules are prohibited for other payment methods, we see a strong risk that regulators apply the same rules to BNPL, given consumer perceptions,” UBS said.

“We highlight the RBA’s draft review of this issue is due in early 2021.”

While survey insights can be used as a guide to the sector outlook, the crux of UBS’ view boils down to future sales.

Namely, that BNPL companies will have to make an absolute stack of them to justify their current valuation.

The simplest example of that is Afterpay, where the bank’s base case is for sales to climb to $51bn by 2025.

That’s a healthy increase from the FY20 result of $11.1bn. But to justify its current valuation, Afterpay will need to book $170bn in sales over the next five years, UBS said.

And to meet the bank’s upside forecast of $125 per share, Afterpay will have to build its customer base to 65m across its current markets.

“This may equate to 24%, 18% and 18% of the Australia / New Zealand, US and UK adult populations, respectively,” UBS said.

While those may look like gaudy, abstract numbers for current investors, they also tap into one of the core discussion points around BNPL valuation; whether the rising tide of the broader market will continue to lift all boats.

For example, despite a first-mover advantage in the local market, BNPL platforms are still only used at 13 per cent of Australian merchants, UBS said.

Whether the technology facilitates fundamental shifts in consumer behaviour over the long term could be one of the key determinants of whether the cohort of ASX BNPL stocks can maintain their current growth rates over the medium term.