Shares in buy-now-pay-later company Sezzle Inc (ASX: SZL) have continued to fly high – up nearly 23% yesterday.
Sezzle’s shares have returned an even more impressive 230% over the past 12 months as they rode the BNPL wave with other competitors such as Afterpay Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P) and Openpay Group Ltd (ASX: OPY).
Target agreement
Sezzle’s share price shot up today after announcing it had entered into a three-year agreement with Target Corporation (NYSE: TGT).
Not too many details were provided, but it told the market that Sezzle’s product will be used in-store and across Target’s digital platforms. This will provide guests access to interest-free payment plans for purchases.
Target achieved annual FY21 revenue of US$92 billion, so the partnership undoubtedly represents a fairly large opportunity.
Zip’s expansion plans
Sezzle’s not the only BNPL having a good day today. Zip’s shares are up 3.72%, presumably partly due to some of the positive sentiment around Sezzle.
Zip recently announced that it’s made two acquisitions, giving it a more established presence in Europe and the Middle East.
For more reading on these acquisitions, click here to read: Is it time to buy Zip (ASX: Z1P) shares after its recent acquisition?
My take on Sezzle and Zip
The narrative around BNPL has been undeniably hyped over the past year. The valuations of these companies should not be ignored, despite the exciting growth story that may lay ahead.
Valuation aside, I think the saturated nature of the BNPL industry is going to make it increasingly hard for some of these companies to remain profitable.
Customer acquisition costs (CAC) will be one of the key metrics to look at and how this compares to the amount of value that can be provided by each customer.
One of the reasons why I think acquiring and retaining new customers will be increasingly expensive is due to Sezzle (and other BNPLs) having non-existent switching costs.
You see, as a customer, I have no reason to remain loyal to one particular BNPL brand as they all offer the same product. Therefore, marketing spend will likely need to be increased to retain customers, resulting in a potentially unprofitable operation.
As part of the Rask investment philosophy, we try to look at companies with high switching costs which can provide a sustainable competitive advantage.
To read more, click here to read: My top 3 ASX software shares for June.
