Perhaps it’s a sign of my age (I’m still under 30) but I would think long and very hard before buying Splitit Ltd (ASX: SPT) shares at the current price.
If you’re looking for a great overview of the differences between Splitit and the other uber-popular buy now, pay later company in Afterpay Touch Group Ltd (ASX: APT), read Max Wagner’s article, “Afterpay (APT) Shares Vs. Splitit (ASX:SPT) Shares”.
About Splitit
In brief, Splitit offers consumers the ability to split the purchase price of basic products (e.g. lemons, toilet paper or both).
As Splitit’s website reads, “Shoppers can split their purchases into up to 36 interest-free monthly payments using their existing Visa or Mastercard.”
Note: Visa Inc (NYSE: V) and Mastercard (NYSE: MA) are the world’s two most powerful payment networks.
If you read the Annual Report notes, you’ll notice that Splitit records its revenue using a “funded” or “basic” funding model. This was a key focus during Deloitte’s audit of the financial statements.
Basically, either the bank or retailer/merchant is on the hook if the customer fails to pay for their lemons.
That differs to Afterpay’s model because in that case, Afterpay wears the losses of the consumers. I could guess which one is preferred by retailers (i.e. likely to grow faster).
Why I’d Avoid Splitit Shares Right Now
I’m all for innovation and supporting Australian businesses, especially businesses that are founder run.
However, there are quite a few reasons I would stop and seriously consider whether now is — or isn’t — the right time to buy Splitit shares.
In their latest annual report, Splitit reported $US790,000 ($1.1 million) of revenue. By my calculation, Splitit currently has a market capitalisation of over $300 million!
This lofty valuation comes at a time when the company is not yet profitable and competitors are popping up everywhere.
It faces competition from other short-term credit apps like Afterpay, Sezzle, Affirm. Then there are payment giants like PayPal and Amazon. Last but not least there is Visa and Mastercard.
In a recent presentation, Splitit said its ‘addressable opportunity’ was $US4.5 trillion. That’s not a typo.
It may as well say ‘the universe is our market’!
But, seriously, I don’t think I’ve ever heard of a small company putting a number that big in a presentation. Ever.
I mean, sure, anything is possible. But is it probable Splitit will capture a meaningful amount of the market? I don’t think so.
To me the fact that it listed that number says more about the company’s Investor Relations strategy than its investment merits.
What Now?
Part of me couldn’t believe it when I saw Splitit was among the most popular stocks on the ASX. May the gods have mercy on us.
Frankly, I think the Splitit share price has been driven more by punting speculators and fluffy presentations than fundamental business performance.
Now, I should say that the shares could go on to prove me wrong — for shareholders’ sake, I hope it does.
But unfortunately, I’ve seen these types of valuations countless times before and more often than not it ends in disaster for people who cannot recognise the difference between speculation and investing. As I said I hope I’m wrong.
If you’re looking for the names of two small-cap ASX tech shares with more reasonable valuations, grab a copy of our free investing report below…
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At the time of writing, Owen Raszkiewicz does not have a financial interest in any of the companies mentioned.
