Unless ASX-listed BNPL shares experience a dramatic Christmas rally, the sector looks likely to underperform the S&P/ASX 200 Index (ASX: XJO) in 2021.
This sort of performance almost seems uncharacteristic for companies like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P). Since 2018, these Aussie buy now, pay later (BNPL) high-flyers have cemented substantially higher returns than the benchmark — prior to this year.
However, this year gave rise to headwinds for ASX BNPL shares, leading to a dramatic shift in sentiment. For investors, the important question is: will the waning optimism continue into 2022?
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What does the future look like for ASX BNPL shares?
The BNPL industry has never exactly had it easy in terms of criticism. From the early days, many ridiculed the interest-free option as an investment prone to increased regulation, competition, and bad debts. Despite this, investors swarmed the burgeoning market in recent years.
Fast forward to the present and these sceptical remarks are beginning to be heard by market participants. Adding fuel to the fire, payments industry expert Grant Halverson is forecasting bleak days to come in the next year for ASX BNPL shares.
According to Halverson, there are three key headwinds that instalment payment providers could face in 2022:
- Rising bad debts
- Higher interest rates compressing margins
- Lack of moat
For these reasons, Halverson holds a concern that the companies' balance sheets and cash flows could come under pressure in the year ahead. Equally, Halverson suspects ASX BNPL shares could be in for another year of poor performance.
This isn't exactly music to the ears of BNPL investors. Especially when all of the notable ASX-listed BNPL shares have been trounced by the broad market index this year. The mining and bank-heavy index easily outpaced the payments sector this year due to its sizeable gains in financials.
As shown in the chart above, Latitude Group Holdings Ltd (ASX: LFS) was one of the better performing shares out of the ASX BNPL shares basket. Yet, even the best of the bunch declined by 26.3% compared to the benchmark's 8.74% gain.
A positive take
There are still a few brokers undeterred by the potential headwinds described by Halverson. For instance, the team at UBS holds a neutral rating on Zip shares. The broker believes the Zip share price would be fair value at $5.20, compared to its current $4.91.
Finally, Macquarie analysts had a buy rating on Afterpay prior to its surprise merger proposition from Square Inc (NYSE: SQ).
