As the world emerges from the pandemic, policy makers have hinted that financial conditions may start to tighten up at the edges.

And just like back in February when bond yields rose, high-growth tech stocks have come under pressure in recent weeks.

High-growth tech on the ASX is almost synonymous with BNPL (buy now, pay later). It’s been a rough few weeks:

HUM Humm Group Limited 0.825 -3.5% -12.7% -18.3% $423,454,412
SZL Sezzle Inc. 5.1 -7.9% -22.6% -28.7% $1,096,675,786
CI1 Credit Intelligence 0.015 0.0% -16.7% -46.4% $24,040,853
OPY Openpay Group 1.27 -2.3% -4.5% -54.5% $137,707,768
LBY Laybuy Group Holding 0.46 -5.2% -12.4% -67.4% $123,414,167
SPT Splitit 0.415 0.0% -3.5% -69.8% $193,523,121
ZBT Zebit Inc. 0.7 -3.4% -12.5% 0.0% $68,591,310
PYR Payright Limited 0.345 -5.5% -9.2% 0.0% $25,093,816
LFS Latitude Group 2.2 1.9% -4.3% 0.0% $2,160,000,000
Z1P Zip Co Ltd. 6.52 -4.8% -3.8% 0.5% $3,867,790,480
IOU Ioupay Limited 0.25 -3.8% -16.7% 100.0% $143,367,137
DOU Douugh Limited 0.062 -1.6% -33.3% 100.6% $28,434,747
FFG Fatfish Group 0.052 -3.7% -17.5% 205.9% $55,951,013
APT Afterpay Limited 113.6 -5.0% -13.1% 42.6% $34,694,398,502
NOV Novatti Group Ltd 0.415 -3.5% -17.0% 72.9% $139,513,862
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The big names

The table reveals monthly falls of more than 10% for most of the sector’s big names — a hefty chunk of which came yesterday.

Of the dedicated BNPL plays, Sezzle (ASX:SZL) leads the laggards with a fall of more than 20%.

In late August, the US-based company submitted its Form S-1 with US regulators as it continues to pursue an IPO on a US exchange.

At yesterday’s close of $5.10, SZL shares have fallen almost 50% from when it initially flagged its US IPO ambitions back in April.

Of the large cap BPNL stocks, Zip Co (ASX:Z1P) is the best performer with a monthly drop of only ~4% to $6.52.

Unlike its competitors, Z1P has kept the news flow coming in recent weeks with a push into the Indian market and a tie-up with Microsoft.

Down 13% over the last month, sector leader Afterpay (ASX:APT) is now trading beneath $115 — its lowest levels since Square Inc’s marquee all-share bid which valued APT at around $126 a share.

For the big names, those current trading levels still mark returns of +10x for brave investors who scooped up BNPL stocks at the height of the COVID-19 selloff, before the sector re-rated.

But it makes for a complex outlook from here.

To get a read on the space, Stockhead placed a call to professional investor (and resident BNPL expert) Dean Fergie, from Cyan Investment Management.

The expert view

If Square Inc has bid for Afterpay at a currency-adjusted value of $126 per share, shouldn’t it be trading at or near that level?

Fergie noted that Square Inc’s all-share bid means the outlook for APT is now directly tied to that of the US payments company (a tech/growth stock which is down around 20% since it announced the Afterpay deal).

“With respect to APT, what you see is the fact that investors over the next 6-12 months will own a Nasdaq-listed stock,” Fergie said.

“Obviously there’s been some recent gyrations with the Nasdaq and more volatility, which is creating some resistance with investors in terms of how how much exposure they want to Square Inc.”

“So I think that’s why it’s probably trading at a bit of a discount because people see it as a bit of an elevated risk.”

It’s also increasingly unlikely that Afterpay will become the subject of a bidding war — a possibility that was briefly thrown around at the time the Square Inc deal was announced.

“At the time that deal had the blessing of major Afterpay shareholders and directors, so that already made it unlikely another player was going to come in,” Fergie said.

Also, “I think Square have some valuable currency in their share price and what that’s valued at. So for a traditional financial organisation to come in and outbid them would be difficult”, he added.

“To me the fact that APT shares are trading at a discount to the takeover premium just suggests investors aren’t expecting another deal will be put on the table.”

Is more consolidation coming? Fergie said it’s unlikely a bigger fish like the merged Square/Afterpay entity will try to snap up smaller competitors.

Although “we might see consolidation among the smaller players, that either creates value or shores up their business (and it’s more likely to be the latter)”, he said.

He also cited the recent IPO of Touch Ventures (ASX:TVL), which is 24.3% owned by Afterpay and has stakes in BNPL platforms based in China and the UAE.

“That’s a bit of an unusual structure, but we’ve seen APT take stakes in a number of other BNPL players in jurisdictions they don’t necessarily want to compete in on their own,” Fergie said.

“Maybe Afterpay will look at taking those businesses over in the future. But in terms of smaller ASX players, I’d be surprised if we didn’t see them getting together over time to join forces against the market leaders.”

How to invest

Looking ahead, Fergie said the reality for current investors is that ‘bottom-up’ (company focused) stock pickers need to invest with the changing (‘top down’) macro environment.

“If you follow a bottom-up strategy you can fall into a trap of being quite concentrated into sectors. And I think it’s a risk to be overweight or underweight — whether that’s high-growth tech or traditional dividend paying ‘value’ stocks,” he said.

“You need to look at being diversified if you’re trying to match the market because I think everything’s uncertain right now.”

Geo-political risks, the reversal of ultra-easy monetary policy and a non-linear economic emergence from the pandemic are all in play.

“It’s a difficult time to put your balls on line and take an absolute bet one way or the other,” Fergie said.

“So for us you don’t want to be underinvested, because you’re still not making much money with your cash in the bank.

“But I wouldn’t say we have total confidence one way or another — certainly with respect to tech because I think it’s a bit too risky.”

“Looking outside of BNPL we’ve seen companies like Dubber (ASX:DUB) come off ~30% as well over the last few weeks.”

“If you end up on wrong side, or putting money into placements at the top of the market you can lose a lot of money pretty quickly,” he said.