The surge in inflation and rising prices has prompted consumers to seek alternative payment methods, where buy now pay later (BNPL) services have emerged as a popular choice. Avoiding high credit card interest rates, budget-conscious consumers are turning to BNPL platforms to spread their payments over manageable periods.
As a result, the market has experienced explosive growth in recent years. The global BNPL market is projected to skyrocket from US$16 billion in 2023 to a whopping US$115 billion by 2032, growing at a CAGR of 25.3%.
Investors eyeing BNPL stocks may want to take a closer look at the following companies positioned to benefit from the trend. Their business models are aligned with the changing consumer behaviour to capitalize on the growing demand for deferred payment options and ride the rising tide of consumerism.
U.S. retail giant Walmart (WMT) operates over 4,600 stores in the U.S. and over 10,000 stores globally. The firm racked up over US$440 billion in domestic sales and US$115 billion in international sales.
Walmart recently made a deeper push into the buy now pay later market as fintech firm One, majority-backed by Walmart, recently started offering BNPL loans for high-end items at U.S. Walmart stores.
One will compete directly with Walmart’s current BNPL partner, Affirm, which contributed to the retailer’s US$648 billion revenue last year.
One is part of Walmart’s plan to expand into non-retail sectors like finance and healthcare to diversify revenue streams and accelerate profit growth. As part of this strategy, the retail juggernaut plans to acquire smart-television maker Vizio for US$2.3 billion, as it looks to bolster its advertising business, which generated US$3.4 billion last year.
“Wide-moat Walmart’s unrivalled scale relative to its brick-and-mortar retail peers provides the firm with the rare ability to formidably adapt to a dynamic retail landscape,” says a Morningstar equity report.
Walmart primarily sells household essentials like food and paper products which insulates its financial performance from economic fluctuations.
“Consumers are attracted to Walmart’s stores due to its unique promise of a wide assortment of goods at low prices, which in turn drives high transaction volumes and unit sales,” says Morningstar equity analyst Noah Rohr, who recently upped the stock’s fair value to US$50 from US$49, prompted by better than expected fourth-quarter earnings.
Fintech heavyweight PayPal (PYPL) provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company boasts 426 million active accounts and owns Venmo, a person-to-person payment platform.
As a global leader with more than 20 years of payments experience and 11 years of BNPL experience, PayPal is a brand that merchants and consumers trust.
The electronic payment processing pioneer has made strategic acquisitions to strengthen and broaden its BNPL footprint. PayPal data shows approximately 25 million active users worldwide utilized the BNPL option for purchases on PayPal, resulting in a total transaction volume of US$20 billion.
With the number of BNPL users projected to surpass 900 million globally by 2027, from 360 million in 2022, PayPal is well positioned to benefit from the growing consumer preference for deferred payment options.
“PayPal remains a somewhat unique player within the payments space,” says a Morningstar equity report, stressing that this remains its key strength, but cautions “its position on both the merchant and consumer side could be challenged over the long run.”
The relative convenience and security of its platform make PayPal a preferred partner in the online world. However, “its market position is not so strong that the company can dictate terms to other players,” contends Morningstar equity analyst Brett Horn, who puts the stock’s fair value at US$104.
Jack Dorsey-founded fintech company, Block (SQ) provides payment services to merchants, along with related services. The company also owns Cash App, a person-to-person payment network, and boasts a payment volume of US$200 million.
Formerly known as Square, Block acquired BNPL leader Afterpay in 2021 for US$29 billion, its largest acquisition ever. Afterpay contributed more than US$800 million of revenue and $US588 million of gross profit to Block in 2022. Block’s BNPL platform strengthened further in the last quarter of 2023, ringing up US$8.6 billion in gross merchandise value, up 25% from a year before, driven by the company’s pay-in-four offering and single-use payments.
“Square has seen dramatic growth over the years, and while it has not been consistently profitable, the company’s position in its niche [micro merchants] is solidified and that it is nearing the point where it can generate attractive returns over time,” says a Morningstar equity report.
Recent results indicate the fintech firm has had some success in moving upstream in terms of merchant size. Currently, about two thirds of the company’s gross payment volume comes from merchants generating more than US$125,000 in annual gross payment volume. However, “Square’s suite of offerings, quick startup time, and simplified pricing will allow it to attract enough merchants above the US$125,000 level to scale and reach an attractive overall return,” notes Horn, who recently increased the stock’s fair value to US$90 from US$83, prompted by better profitability assumptions.
