The Secret Broker: Buy Now, Fish Later

Well, the heat was turned up on one of the market darlings this week, when PayPal and Apple both announced they will start to roll out their Buy Now Pay Later (BNPL) offerings.

In the previous week, CBA also revealed their BNPL client solution, but this did nothing to the Afterpay (ASX:APT) share price then.

It took the big American Yankee-sized artillery to be rolled out, fully packed with news release missiles, to finally pierce the APT ‘armour protected’ valuation.

So, at the start of the week, APT were valued at A$35.8b and by midmorning Thursday, their valuation was A$30.3bn.

Now, if you compare their valuation to CBA’s A$174bn, you will see that APT appears to be based on a young and fresh faced future. CBA’s – a blue rinse, wrinkly skin and stability.

Now, CBA pays a dividend but APT doesn’t. But APT has the ‘first mover’ premium built into its valuation and reminds me a lot of when Xero first appeared on the investment scene.

Xero was listed in 2007 on a A$55m valuation and its model was to offer a Software as a Service (SaaS) solution to accountants and their clients.

The joke from a few of the financial wags at this time was that this is the first stock in history to be named after its profitability, which at the time was zero.

Today, they are a A$19bn company and now sell their services to accountants and their clients in 180 countries around the world.

They were backed in their early days by tech savvy Americans, who had moved to New Zealand, for its lifestyle and its tax advantages. One of their big backers was Elon’s buddy from their PayPal days, Peter Thiel.

He only later became a citizen of Kiwi land in 2011, though he knows a winner when he sees one.

You won’t find a better investor to follow than our Pete.

Short shorts?

In the mid 80s I would have certain clients who loved to short Microsoft. It’s for the same reasons why many people like to short APT and, in their early days, Xero.

They say the numbers don’t stack up and that they are overvalued and are going to zero. They had the same argument for Tesla shares…

They eventually all get squeezed, as somehow the companies do grow into their future-centric valuations and maintain their market darling status.

They sort of reach a certain stage, where they become too expensive to be taken over by their old school rivals.

Even at $30bn, anyone from the staid old school of companies (think banks) would be shot down in flames if they attempted to take over APT. They are all used to taking out potential rivals whilst they are in their junior pants. Not when they are rebellious teenagers, going on 30.

People ask me all the time about these types of companies and when I try to explain to them why I wouldn’t want to take on their valuations and go short, their eyes and ears start to glaze over.

I would always struggle to explain to them why the market creates these valuations, in layman terms.

But here’s a story from the BBC I came across in my internet wanderings, that now makes it easy to explain, in a single photo:

secret broker bnpl — Nick Robinson with his catch in 2010. Picture: BBC

This boy is holding a common goldfish (or Carassius auratus to those of you who went to posh schools). When a goldfish is kept domestically in a goldfish bowl, it will only grow to a size that is determined by the size of the bowl.

However, if they escape from the bowl and get into a river, they grow very big and wreak hell on all the other fish.

They steal their food chain, muck up the gravel and destroy all the edible weeds, and there is no constraint on the size and pack numbers they can grow to.

A large one, like the one above, can travel over 230km in a year, breeding more giants to take on all-comers.

Here endeth the lesson

The big companies want to keep any potential rivals contained in a small bowl, where they can control their growth.

Occasionally, if one looks a little bit bigger than the others, they can scoop it out and put it into their own head office fish tank.

But if one escapes, OMG. It will wreak havoc on their customer base and their old business models. Their only form of defence is to copy the golden fish, as it finally dawns on them that this destruction of their customer base is getting out of hand.

The big banks and payment gateways now realise that Afteray has escaped before any of them could catch it. And the market has pushed their value so high, that they can’t justify taking it over, to their shareholders.

Their only solution is to copy them.

So, the next time one of the kids comes home from the school fair with a little goldfish in a water-filled bag, don’t be like the shorters and their capital and flush it down the toilet.

No, no, no.

Buy it a bowl and some food. Name it something like Zip or Sezzle and every six months buy a bigger bowl and sit back and watch it grow.

It could be one of the best investments you ever make.