- BNPL and cryptos were the two worst investments for Aussies in 2022
- Stockhead contacts Omkar Joshi of Opal Capital to ask his opinion on the BNPL market
- And which BNPL stocks have risen or fallen in June?
It has been a wild ride for Australian investors this year, with many asset prices falling, some even off the cliff.
If you had invested in a diversified portfolio of Aussie blue chips, your year-to-date return would be close to minus 11%, which is equivalent to the return of the ASX 200.
If you had shifted your investment towards Tech (XIJ), your portfolio would have fallen by 38%, while a mining (XMJ) heavy portfolio would set you back only 5%.
However, of all asset classes, two stand out this year as the worst performing cryptocurrencies and the buy-now-pay-later (BNPL) sectors.
The BNPL segment has practically collapsed in the past 12 months, leaving most investors with only pennies per dollar invested.
In total, the BNPL sector has shrunk by about $40 billion in market capitalization this year, mainly by industry leader Block Inc (ASX:SQ2).
Losses in cryptocurrencies, meanwhile, have also wiped out much of the Aussie investor’s portfolio.
Bitcoin has lost nearly 60% of its value this year and is now hovering around $20k from its all-time high of $69k in November.
According to available data, the valuation of the global cryptocurrency market fell by about $1 trillion in 2022, with nearly all leading coins trading at less than half of their record highs.
Aussies are deep in cryptos
While some of the crypto price action can be attributed to the recent failures of Terra and Celsius, most experts believe the current purge is all about getting the weeds out of the grass.
“What you’re seeing now with this sell-off, this pullback, is just a bunch of excess in the space that had to be cut,” Tyrone Ross, CEO and co-founder of Turnqey Labs, told CNBC.
It’s little consolation to the 1 million Australians aged 18 and over who own at least one cryptocurrency, according to Roy Morgan Research, with an average holding of $20,000.
Aussies mainly trade Bitcoin and Ethereum, but also niche names such as Ripple, Cardano, Dogecoin, Shiba Inu, Solana, Binance Coin, Litecoin, Cronos, and Polygon.
In total, $21 billion was in the hands of Australian crypto traders as of February this year.
Assuming 50% of that wealth has been lost since February, that would work out to about $10.5 billion.
That sounds awful – but almost four times more has been lost on BNPL shares.
In the past, experts and investors have touted Bitcoin as an inflation hedge, due to its limited supply of 21 million coins. But the collapse this year, just as inflation is rising, has probably done enough to disprove that theory.
‘A disaster waiting to happen’
For the BNPL sector, to say it has had a difficult year is an understatement. Some BNPL stocks go from market-loving to losing all of their market value in as little as 12 months.
Zip and Sezzle are two BNPL stocks that have lost more than 90% of their value in the past year.
On Wednesday, the sector was under pressure again, with Zip falling another 4% and hitting a six-year low of 44c. Zip’s takeover target, Sezzle, also fell 4% to its all-time low of 25c.
So what went wrong, and is the massive collapse of BNPL stocks on the ASX justified?
“I think it’s very justified,” said Omkar Joshi, portfolio manager at Opal Capitalwho spoke to Stockhead†
“I would argue that the stock price action [in BNPL stocks] we saw that the past two years during the Covid boom was probably unjustified.
“So we’re just seeing a return to where things should always have been,” Joshi said.
He explained that the BNPL business model only works in a good economy, or when there is a lot of government incentives.
“It’s not a sector that works when the economy is tough,” he said.
Joshi argues that BNPLs don’t have the capital like a bank to absorb bad debts, and they don’t have the security a bank would have with a mortgage.
BNPLs also conduct limited credit checks on who uses their products, exacerbating the potential bad debt problem we see now.
“So you basically have an unsecured lender with no capital and minimal credit controls. That’s a disaster waiting to happen.”
According to Joshi, the rising interest rate cycle we are in will also make it harder for companies like BNPLs that rely heavily on raising capital.
“So that’s why I think what’s happening now [to BNPLs] is actually justified, it actually makes a lot of sense,” he said.
BNPL winners and losers in June
How many BNPL shares on the ASX have fallen in double digits in June?
Block’s inconsistent growth performance has contributed to the stock price’s sluggish performance.
The company reported a 43% decline in net profit for FY20, followed by a 22% decline for FY21.
For FY22, Block has announced to the market that it expects a revenue decline of 48.5% and a revenue increase of just 1%.
But it also forecast it to recover in FY23, forecasting 92% earnings growth and 21% revenue growth.
BNPL arm Afterpay, meanwhile, reported a net loss of $345 million for the six months ended December 31 amid a wave of write-offs. The loss was pitiful compared to the $79.2 million net loss reported in the PCP.
Zip’s last half-year results showed that year-over-year revenue grew 89% to $302 million, thanks to record transaction volumes of $4.5 billion.
The number of customers also increased to 9.9 million, a 74% year-over-year increase.
So why has the stock price plunged 90% this year?
First, loan losses deteriorated, rising to $204 million and reaching 2.6% of total transaction volume. This was above the target of 2%.
In addition, total borrowings were $2.4 billion in December 2021, compared to net assets of just $1.2 billion.
Zip’s takeover target, Sezzle, has also crumbled by 90% this year.
The company earned total income of $115 million in FY21, followed by a solid first quarter of $27.6 million.
But like its peers, Sezzle is facing several headwinds, with some experts predicting it won’t be able to raise more money except in the “most troubled terms.”
Zip valued Sezzle at $491 million when it announced the acquisition in February.
Humm’s share price drop of 44% in June was mainly the result of the massive resignation of board members.
Five of the six board members of Humm have resigned after resignation Latitude Group (ASX:LFS) walked away from buying Humm’s BNPL business.
Latitude had previously offered to pay $335 million in a bid that would have kick-started its push into the BNPL sector.
Humm’s board members resigned after saying they could not partner with major shareholder Andrew Abercrombie, who vigorously opposed the sale by calling it a “garage sale.”
Payright was the worst of the bunch this month, dropping nearly 60%.
The company’s performance has been really solid. In the last quarter, it reported gross receivables of $97 million, up 59% from PCP.
But like its competitors, the company’s bad debt has risen steadily – from 1.64% in March 2021 to 1.84% in March this year.
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