Buy now, pay later (BNPL) shares are running hot today after a couple of quarterly updates.
In response to those updates, the Afterpay Ltd (ASX: APT) share price is up 1.8% and the Zip Co Ltd (ASX: Z1P) share price is up 7%.
The entire BNPL sector is still expanding at a rapid rate. There is plenty of room for them all to grow at this stage. The success of others could mean promising things for the rest of the industry that haven't released a September 2020 update yet.
Sezzle Inc (ASX: SZL)
Sezzle reported a strong set of numbers in its update for the quarter for the three months to 30 September 2020.
The BNPL operator reported underlying merchants sales (UMS) increased 231.5% year on year to US$228 million, up 21.4% quarter on quarter.
Merchant fees as a percentage improved to 5.8%, up from 5.6% from at June 2020 and 5.2% from 30 September 2019. Rising margins is a good sign for Sezzle.
Active consumers rose 178.1% year on year to 1.79 million (and was up 21.5% quarter on quarter) and active merchants rose by 178.3% year on year (and grew 29.7% quarter on quarter).
One of the most pleasing aspects of the BNPL company's update was that its active consumer repeat usage grew to 89%, which meant that repeat usage has increased for 21 straight months. This is an important part of lowering loss rates and improving the net transaction margin. Sezzle now has an annual run rate of almost US$1 billion.
The Sezzle share price is currently up by 7.1%.
Splitit Ltd (ASX: SPT)
Splitit is another high-growth BNPL operator and it reported a strong set of growth numbers.
It said that merchant sales volume (MSV) grew by 214% year on year to US$70.9 million. This helped gross revenue soar 318% to US$2.4 million.
Total merchants jumped 117% year on year to 1,400 and total shoppers grew 97% year on year to 362,000.
Splitit said that self-onboarding is now live in the US, it added over $3 billion of addressable online merchant sales in the third quarter of FY20 and it has expanded into the professional services vertical in the US and Australia with QuickFee Ltd (ASX: QFE).
The Splitit share price is up more than 1% right now.
Is it time to buy shares?
The growth of the BNPL sector is undeniable. If you've been a medium-to-long-term shareholder in any of these players then you're probably sitting on good gains.
They probably have a lot of customer growth and underlying sales growth to go because of how large the potential addressable online market is. Particularly because of this difficult COVID-19 period.
All the BNPL players are growing internationally. But the big question is how profitable will they be in the future?
Will merchants demand lower fees if BNPL is not bringing in as much growth? Does the future of the BNPL sector point towards a couple of large players like PayPal and Afterpay. Or is there enough room for all of them to be growing and profitable?
I'm just not sure. There is a lot of growth expectations built into the current share prices of Afterpay, Zip, Sezzle and Splitit. They keep delivering on near term expectations, but the long-term for all of them seems less obvious to me.
I'm cautious about businesses that aren't making a profit (or close to a profit), particularly when there's a lot of competition in the sector.
For me, there are other share opportunities that seem like better choices and can generate good cashflow without needing large amounts of debt funding.
