📱 Is Apple Too Late To Enter BNPL?

Target to get rid of excess inventory.


Hey Global Investor! Here’s what you need to know before the US markets open.

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📱 Apple: Nothing Left To Bite?

The Buy Now Pay Later (BNPL) market resembles an overcrowded train. The train now has a new entrant – Apple Inc. (AAPL). The “Apple Pay Later” product has been in the works for a year. The sector as a whole is going through an existential crisis. Is there anything left to bite?

Who’s Aboard The BNPL Train?

According to credit scoring companies, credit card debt in the US stood at $841B in Q1 2022. Unfortunately, buy Now, Pay Later (BNPL) operators seem to be less reliant on such scores or, in some instances, even bypass them. This makes it difficult to determine an individual’s ability to repay a loan and ends up attracting consumers with limited savings and low credit scores.

Customers flush with cash from the Federal Reserve stimulus checks triggered a free-for-all among BNPL companies. The market size, which currently stands at ~$100B, is expected to grow at a 45.7% CAGR to $4T by the end of the decade. In addition, one out of every three customers surveyed by Lending Tree mentioned that they were considering using a BNPL loan this month.

BNPL companies rely on credit lines whose interest rates fluctuate along with the Federal Reserve’s benchmark rate. All of this worked well when the rates were close to zero. That rate is steadily going up, having risen 0.75% so far this year. This means that BNPL companies are already paying more for their funding.

Loan defaults and delinquencies are starting to hurt the balance sheets of BNPL companies:

  • Affirm: Outstanding loan dollars held on the company’s balance sheet, which are at least 30 days late, stood at 3.7% in March, up from 1.4% Y-o-Y.
  • Afterpay: Bad debts more than doubled Y-o-Y in the second half of 2021
  • Zip: Bad debts and expected credit losses surged 403% from last year during the last six months of 2021.

As such, once high-flying stocks came crashing down. Affirm trades well below the $49 IPO price today. Block (formerly Square), which created a furor in the BNPL market through its $29B acquisition of AfterPay, also recently made a 52-week low of $65. Swedish BNPL giant Klarna plans to raise $1B at a valuation of ~$30B. That’s down from the $46B valuation it managed to capture last year.

BNPL firms have been under intense scrutiny from regulators who want to bring the sector under greater supervision due to misleading claims. For example, Klarna, Clearpay, Openbay, and Laybuy have been forced to change their terms by the Financial Conduct Authority, so they are easier to understand.

As the regulatory Sword of Damocles hangs overhead along with a deteriorating economic environment, intense competition has left BNPL players scrambling. In a fight for survival, they’re desperate to capture more and more customers. Amidst this, Apple is the newest entrant vying for part of the action.

Late To The Party? Or…

On Monday, the iPhone maker announced its BNPL entry through “Apple Pay Later.” The product was unveiled at the Worldwide Developers Conference (WWDC) 2022. The service will be available through Apple Pay. The service will allow consumers to pay for purchases in four equal installments and can be paid over six weeks, with the first tranche of payment done upfront.

The installments will have no interest or fees. Goldman Sachs will extend the loans needed for the installment offerings. For now, only iPhone and Mac users in the US can avail this service. Apple Pay Later will operate on the Mastercard network. Merchant fees are yet to be disclosed.

Apple Pay is the largest in-store mobile wallet player, with a 45.5% market share. Apple Pay users worldwide have increased 600% over the last four years to 507M. 93% of US smartphones had access to Apple Pay in 2020.

Incumbents have been putting contingency plans in place to tackle Apple’s entry. Last week, Affirm announced a partnership with Stripe to help businesses grow their revenue. Klarna had done the same thing with Stripe last October.

Block, the owner of AfterPay, offers a debit card via its Cash App, its most profitable vertical. Affirm too has a debit card which is enabled with pay-later options. Klarna opened a waitlist for US customers in February, for which over 1M consumers signed up. Klarna’s US customer base has grown 65% to 25M over the last 12 months.

On the business front, Apple moved some of its iPad production to Vietnam to combat the production shortfall due to Covid curbs in China. iPad was Apple’s only business that saw a drop in revenue in Q2 of 2%. After Apple warned that supply constraints could hurt sales by ~$6B, Shares dropped post results.

The jury is still out on whether Apple’s BNPL announcement is a masterstroke or too little too late. While it might take a while for Apple Pay Later to scale, investors in competing companies spoke with their feet. Shares of Affirm fell 5.5%. Zip also declined 14% on Tuesday to an all-time low.

Apple’s stock touched $3T in market capitalization earlier this year, becoming the first company to do so. The stock has since corrected 20%. Even so, it’s the second most expensive among FAANG companies, trading at 23.6x price-to-earnings on a trailing-12-months basis. On a price-to-sales basis, the stock is the most expensive among FAANG companies, trading at 6.7x.

Apple’s entry may have caused some consternation among the BNPL brethren. Will its brand equity be enough to garner a lion’s share of the market? Has it entered a market in which there’s nothing left to bite? We can read now, answer later!

Market Reaction
AAPL ended at $148.71, up 1.76%.

Company Snapshot 📈

AAPL $148.71 +2.57 (1.76%)

Analyst Ratings (43 Analysts) BUY 74%  HOLD 23%  SELL 3%


Newsworthy 📰

Good Riddance?: Target expects squeezed profits from aggressive plan to get rid of unwanted inventory (TGT -2.44%)

Approval Next?: Novavax’s Covid-19 vaccine backed by FDA advisers (NVAX +22.13%) (A)

Under The Lens: Australian regulator sues Airbnb for allegedly misleading customers on pricing (ABNB +0.72%)


Later Today 🕒

  • Bausch & Lomb Corporation Earnings (BLCO)
  • Campbell Soup Co. Earnings (CPB)
  • Five Below Inc. Earnings (FIVE)
  • Thor Industries Inc. Earnings (THO)

Today’s Fun Fact

Airbnb is active in every single country on the planet except for Iran, Sudan, Syria, and North Korea


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