The Afterpay Ltd (ASX: APT) share price currently has a market valuation equal to Santos Ltd (ASX: STO). Whether you think Afterpay is overbought or not depends on whether you think it will grow its earnings to match its valuation. However, from this point, 2 things are pretty clear.
First, it is unlikely to double in price again, let alone another 2 or 3 times. Second, it is clearly the market leader in Australia and possibly the second globally behind the Commonwealth Bank of Australia (ASX: CBA)-backed Klarna app.
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Does the Afterpay share price indicate a bubble?
Last week saw most buy now pay later (BNPL) companies valuations rise. The Splitit Ltd (ASX: SPT) share price rocketed up by 110% last week. Meanwhile, the Sezzle Inc (ASX: SZL) share price continued winding its way upward, rising by a massive 30.13% last week. The Afterpay share price rose by only 12.87% by comparison, and Zip Co Ltd (ASX: Z1P) actually fell by 4.5%.
These wild swings are exactly what we saw in the dot-com bubble. There was always a share of the moment that defied gravity to rocket upwards out of nowhere and for no real reason. Followed by others crashing.
But this time it's different
The dot-com bubble created no real value for the most part. Just wild speculation about what was possible on the internet. Even though the Afterpay share price has inflated so much, BNPL is vastly different. It speaks to 2 separate dynamics in the marketplace today. First, the rise of Gen Z in particular, but also millenials.
These generations eschew credit cards. It pays to remember that the millenials spawned the Financially Independent Retire Early (FIRE) movement. For whatever reason, these 2 generations are extremely financially savvy and appear to have learned a lot from the errors of Gen X, in particular.
The second dynamic is the shrinking of discretionary income. For years Australians have seen very low wage growth. At the same time taxes and charges continue to balloon. Moreover, prices for food staples continue to increase, as do house prices.
Foolish takeaway
The BNPL sector is definitely not a bubble. It is one of the last ways left for most people to acquire discretionary items. The market in Australia, the US and Europe is very large and underserved.
While the Afterpay share price has risen to a point where it is unlikely to see large scale growth, there are still very good growth opportunities. Personally, I have invested in Sezzle. However, I also like Zip Co as a prospective share purchase.
