Here’s what really drove the surge in demand for Splitit that underpinned its meteoric early rise
Link copied to
The rise of listed buy now, pay later platforms has made Australia’s small-cap investment community stand up and take notice.
And so far this year, no company has caught the market’s eye quite like Splitit (ASX: SPT), which rocketed higher after listing on January 29.
The IPO was timed on the back of a strong year for competitors Afterpay (ASX: APT) and ZipCo (ASX: Z1P), which both posted strong gains in 2018.
And the platforms stayed front and centre into the new year, ahead of Senate committee review on the sector at the end of February.
The committee was formed in response to community concerns that buy now, pay later platforms constitute a form of predatory lending.
But critically, lawmakers stopped short of a ruling that would’ve forced companies in the space to implement stricter credit checks — similar to the standards imposed on a bank.
Markets cheered, as Afterpay and Zip Co immediately rose 14 per cent after coming under significant pressure in the preceding months.
Those moves didn’t match the price action of Splitit, however, which took a bump after the Senate announcement and then continued to go parabolic.
Splitit raised $12 million in its January IPO by issuing 60 million shares at 20 cents a pop, giving the company an initial market capitalisation of $54 million.
By March, it was worth more than $450 million, after hitting an all-time intraday high of $2 a share on March 11 when almost 60 million SPT shares traded hands. A ten-bagger return in a shade under a month and a half — and while Splitit’s merchant fee revenue is growing, the company still booked a loss of $US4.6m last year.
As its price shot higher in the early going, Splitit made no company announcements during the period which were grounds for a significant re-rating of its near-term earnings outlook.
And the company’s rapid ascent also prompted a please-explain from the ASX on the same day it reached its peak. In response, Splitit advised there was nothing material it hadn’t already made public — although it did point to a steady diet of media coverage at the time that “may explain the recent increase in share price and trading volumes”.
Broadly though, the price action appears to be a case of momentum trading and a severe case of FOMO (fear of missing out) among Australia’s community of small-cap traders.
To investigate further, Stockhead ran some technical analysis based on Bloomberg data to asses Splitit’s Relative Strength Index (RSI) when the price peaked in early March.
The RSI measures the speed and change of price movements (most commonly over a period of two weeks). It’s presented on an index from 0-100, where anything above 70 is considered overbought, while a reading below 30 signals excessive selling.
For context, Splitit’s two-week RSI topped out at a reading of 83 — although when trading volumes peaked and Splitit reached $2 a share, its two-day RSI was an impressive 98 — indicating the price movements in the stock were being driven almost purely by demand.
Following that peak though, the stock commenced a pretty rapid descent to a March 21 low of $1.08, before a smaller rebound. As at close of business yesterday, its RSI had fallen to a reading of 56.81, indicating a more manageable level of price calibration.
In the wake of Splitit’s early volatility, the broader price action suggests the market is clearly still infatuated with the outlook for BNPL stocks.
As an example, Afterpay has climbed steadily of the back of the Senate announcement, and yesterday closed back near all-time highs above $23.
Like its BNPL competitors, Splitit lets consumers defer the cost of purchases – but with a slight twist.
The Israeli-based company launched in its current formation in 2016, and says it now has payment agreements with more than 300 merchants across 25 countries.
Its largest customers are in the US — the market Afterpay is currently trying to crack with CEO Nick Molnar recently relocating to San Francisco.
Splitit’s technology functions as an extra “layer” on customer credit cards, giving them the option to split their purchase into monthly instalment payments for a period of up to three years. Splitit’s prospectus says its technology is patent-protected in the US, with a pending patent for the Australian market.
It also offers three-month repayment terms on debit cards for purchases below $400. The company says its platform is largely used for larger purchases around the $1,000 mark.
Its repayment terms are derived in part from the credit limit and amount outstanding on a given credit card. If the balance on one card is two low, Splitit allows customers to split their payments over two cards — without having to apply for additional credit.
Splitit follows the typical BNPL model by deriving revenue from its retail merchants, who pay a small commission fee on each transaction, but it doesn’t charge fees for late payments.
The company said it derived quarterly merchant fee revenue of $423,000 in Q4 2018, up from $352,000 in Q3.
Despite the positive trend in revenue growth, Splitit’s 2018 year-end accounts to December show it made an after-tax loss of $US4.6 million on revenues of $752,000.
Based on those earnings fundamentals, markets are either excited by the potential for future growth in the sector, or traders spotted an opportunity to make short-term profits by taking advantage of the stock’s early momentum.
Assad Tannous of Asenna Capital, who has more than 50,000 followers on Twitter, documented some of the price action from his account before advising that he’d sold up on March 11:
All out $SPT at 165 average +725%. Fanx for coming. 😉
— Assad Tannous (@AsennaWealth) March 11, 2019
Since then, Splitit’s price has cooled off and its RSI reading has reverted to more balanced levels in the mid-50s.
The stock still has a market cap of more than $300 million — around six times the size of its listing valuation — and closed yesterday at $1.36 after posting an intra-day gain of more than 10 per cent.
Given its impressive early rise, markets will be awaiting the company’s next regulatory filing for the March quarter, to see whether its trend of quarterly growth in merchant fee revenue has accelerated or decelerated to start the new year.