BNPL sector showing signs of a reversal after monstrous selloff

The Buy Now Pay Later, (BNPL) sector has seen a resurgence after a long and brutal sell-off. The reason for, much of the resurgence is not related to any specific catalyst but rather, changing sentiment within the broader market. The sector rose significantly before and during the Covid-19 pandemic. However, as the pandemic came to an end and consumers returned to traditional forms of purchasing, the BNPL sector began to lose some of its steam. In the last few weeks, the sector has seen a resurgence with many of the heavyweights including ZIP, (ZIP) and Square, (SQ2) seeing large surges in their share prices.

Impact of interest rates and recession fears

The big issue with the sector was always going to be how would interest rate changes would affect the sector and its model. The business model generally allows consumers to purchase goods/services in instalments with the requirement to pay interest if the repayments are not met. The interest payments have been a cause for concern from consumers, especially as interest rates have been raised by the Reserve Bank of Australia and other Central Banks. These rate increases created very bearish sentiment for the BNPL sector with ZIP and SQ2 seeing large dips in their share price.

The market also became saturated very quickly, meaning many large institutions and banks created their own BNPL service or bought their own such as Square in the case of their purchase of industry leader Afterpay. This has led to further potential transactions and failed mergers. Specifically, Latitude, (LFS) and its failed acquisition of Humm, (HUM) and ZIP and its failed acquisition of Sezzle, (SZL).

Why the surge?

The price of ZIP has seen a very sharp rise. This has been partially because of the short squeeze that has been able to accelerate the price rise. With so much selling occurring and such a high level of short interest, at some stage, a buying zone had to present itself. Once this zone was established the volume was able to follow through. The market was also buoyed by inflationary pressures easing because of the interest rate hikes.

On both Price Charts below, it can be seen that some kind of ‘bottom in the medium term at least has been found. For ZIP, this was seen at $0.45 and SQ2 at $81. Importantly, and more so for ZIP, the breakout from the bottom was supported by strong buying volume. This likely indicates that large institutions were behind the reversal.

Looking ahead, whilst a ‘bottom’ does seem to be in, the sector is still at the mercy of the overall market and if a recession hits or more bearish sentiment takes over, the BNPL sector may fall again. However, if all the worst outcomes have been priced in already, then long trading/investing opportunities may become apparent.