We are currently experiencing intermittent difficulty during Premium user registration. Thanks for your patience.

These Buy Now, Pay Later Stocks Are Getting Charged Up

Even Apple's hopped on the inflation tailwinds benefitting the instant gratification business.

Vikram Barhat 29 June, 2022 | 7:44AM
Facebook Twitter LinkedIn

 Credit Card Stack

The buy now pay later (BNPL) trend recently got a validation boost with the Silicon Valley giant Apple jumping into the arena. The iPhone maker, known to have a keen understanding of the pulse of global consumer trends, aims to ride the new wave of consumerism with its own BPNL offering.

The demand for interest-free installment payment products has seen explosive growth in recent times. As a result, the BNPL market is expected to skyrocket to US$656 billion by 2026, fuelled by the younger generation’s propensity for instant gratification.

While Apple's foray into BNPL adds a degree of competitiveness, the following incumbent players are well-positioned to maintain their dominance. Their global footprint, early lead and strategic partnerships with key retailers will continue to attract consumers, perhaps more so now as spiralling inflation continues to crimp affordability for big-ticket items.

Online card and payment processer, Marqeta (MQ) offers the infrastructure and tools necessary for digital, physical, and tokenized payments without the need for a traditional bank. It counts companies such as DoorDash, Klarna, and Block among its clients.

The Marqeta card-issuing platform provides its customers with the infrastructure and application programming interfaces (APIs) needed to build and rapidly deploy innovative card payment systems. “The unique capabilities and flexibility of Marqeta’s platform has allowed it to find success with fintech and technology companies, with buy now pay later firms and Block being the most notable,” says a Morningstar equity report.

While growth may decelerate from its 2021 highs, Marqeta will continue to enjoy strong revenue growth, “driven by its exposure to high growth firms like its buy now pay later customers and Block,” the report adds.

Marqeta enjoyed a strong Q1 performance racking up US$37 billion in total processing volume (TPV) and net revenue of US$166 million for the quarter, a jump of 53% and 54%, respectively, from the same period in 2021. 

However, this growth has not rectified Marqeta’s problem with its undiversified customer base, warns says Morningstar equity analyst Michael Miller, who pegs the stock’s fair value at US$13. “The company is heavily exposed to Block, buy-now-pay later firms, and food/delivery services that provide it with substantial growth just from its existing customer base,” he says.

Block will remain a major customer for Marqeta, asserts Miller, but adds that the company “will be able to diversify its customer base with new clients and growth from its buy now pay later vertical.”

Pioneer of electronic payment processing, PayPal (PYPL) offers payment solutions to merchants and consumers, with a focus on online transactions. The company had amassed 426 million active accounts at the end of 2021, including 34 million merchant accounts. It also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform.

PayPal’s buy now, pay later (BNPL) service grew a staggering 256% in Q1, compared to the same period in 2021, with more than 18 million consumer accounts now using its pay-later product.

Building on its Pay in 4 installments service, launched in 2020, the company recently rolled out a more flexible Pay Monthly BPNL product that allows customers to pay for purchases in six to 24 monthly installments.

“PayPal’s development of a network of both merchants and consumers early in the evolution of e-commerce allowed the company to build and maintain an enviable competitive position,” says a Morningstar equity report.

In recent years, PayPal has enjoyed exponential growth fuelled by the ongoing shift toward electronic payments and faster e-commerce adoption in the wake of the coronavirus pandemic.

“PayPal remains a somewhat unique player within the payments space,” says Morningstar equity analyst Brett Horn.

While growth could decelerate in 2022 given global macro headwinds, “PayPal has a path to better growth over the next few years and it can continue to generate solid growth over the long haul as it rides the secular shift toward electronic payments,” says Horn, who recently lowered the stock’s fair value to US$139 per share from US$145, prompted by near-term headwinds.

Formerly known as Square, Block (SQ) provides payment acquiring services to merchants, along with related services. The company also owns Cash App, a person-to-person payment network. Block operations in Canada, Japan, Australia, and the U.K. and generates about 5% of revenue outside the U.S.

Block Inc acquired Afterpay, a global BNPL platform, in early 2022 for US$29 billion to bulk up its BNPL presence. “Strategically, the all-stock deal to buy Afterpay looks like another move to push the company’s business model closer to that of PayPal and strengthen the bonds between its Cash App and seller businesses to create a more fleshed-out two-sided platform,” says a Morningstar equity report.

Given the success PayPal has had with this approach, this is a valid strategy, the report adds.

In the first quarter of 2022, the first since the Afterpay acquisition, the BNPL platform contributed US$130 million of revenue and US$92 million of gross profit, per the company’s note to investors.

Block has integrated Afterpay’s BNLP functionality with its Seller and Cash App businesses in the U.S. and Australia. Nearly 13,000 Square merchants have adopted and processed BNPL sales during the first quarter, adding 10% more active sellers to Afterpay.

“Square has seen dramatic growth over the years, and while it has not been consistently profitable, the company’s position in its niche is solidified and it is nearing the point where it can generate attractive returns over time,” says Horn, who recently lowered the stock’s fair value to US$104 from US$124, prompted by lower long-term margin assumptions. 

Facebook Twitter LinkedIn

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Block Inc Class A60.68 USD-1.94Rating
Marqeta Inc Class A3.57 USD-1.38Rating
PayPal Holdings Inc73.88 USD1.82Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

© Copyright 2023 Morningstar, Inc. All rights reserved.

Terms of Use        Privacy Policy