Afterpay (ASX: APT) and Zip Co (ASX: Z1P) are putting on an impressive show before Thursday’s earnings with APT, and Z1P eyeing $100, and $10 respectively. The BNPL rockets seem to be poised for blast off come Thursday as institutions, main street, and analysts remain bullish. However, as the BNPL hill climbs higher, could a post-earnings cliff edge see thousands of bulls in free fall? Only time will tell. However, objectively breaking down the analysts ratings, the industry’s long-term future, and the current climate should give us a clearer picture?

Table of contents 
1. Institutions lead the Afterpay and ZIP earnings rally 
2. Are investors betting on more than just hype? 
3. Does YIG see value in an investment?

Analysts upgrade Afterpay and ZIP ahead of earnings

Institutions and their analysts were hesitant to give Afterpay and Zip the stamp of bullish approval in March. However, the enormous rally and international expansion of the BNPL giants, particularly APT, saw many analysts push the bullish narrative.

Morgan Stanley, Wilson, and Bell Potter all raised their price targets on Afterpay today above the current market price. For example, Morgan Stanley’s new price target is $106, while Bell Potter’s is $96.70. Consequently, the above market ratings continues to make Afterpay incredibly bullish.

However, it is also the analysts commentary that is driving the optimism. For example, Wilson’s analyst Cameron Halkett stated:

We previously held reservations around Afterpay’s ability to ward off strong global competitors and endure the systematic upheaval of COVID-19 on end-customer repayment ability. To date, these concerns have yet to materialise, and rather than focusing on what could go wrong, we take a fresh view of what has, and what could continue to go right.

Is there more to the BNPL hype than earnings speculation?

The past month attracted the earnings investors, but the question still remains: is ZIP and APT still hype or is there value in an investment? Afterpay and Zip’s core offering of innovative payment solutions holds tremendous value for a digital society. Especially in times of crises, when financial strife runs rampant for businesses and individuals. While investors and legal bodies raise the red flag of unethical purchasing habits for young people we should see legislative action curb the potential for mass-individual BNPL bankruptcy.

Furthermore, as Afterpay inches closer to the ASX/S&P 20, more investors view APT as a safe haven blue chip. However, investors’ buying reaction after a market correction will truly reveal whether APT and Z1P hold value. Increased buying after a sell-off would indicate investors snapping up discounted shares of a quality stock. Conversely, a severe bearish decline, similar to Nikola Motors, would indicate investors were just in it for the momentum.

Does YIG see value in an Afterpay/ZIP earnings investment ?

Before I begin I am obliged to remind our viewers that this is not advice but rather investment commentary from extensive research

Short answer: A short-term investment holds the most potential (opinion not advice) 

Short-term investments in Afterpay and Zip carry a significant amount of volatility. Allowing retail investors to capture massive upswings in the BNPL giants. The buying spree following Q3 2020 earnings was a perfect example. It seems another investing party for the APT and Z1P bulls is increasing in volume as we inch closer to Thursday. Especially, considering the relentless raising of buy ratings from analysts. Ultimately, adding significant weight to investors championing the strategy to invest and ride the earnings momentum.

The dark side of riding the APT wave

However, the issue on a pre-earnings investment is timing your exit. Because when euphoria erupts within, it is difficult to exit the position as you believe your investment is going to the moon. Most investors understand and tell themselves they will exit the position moments before the sell-off. However, how can you exit something moments before when you do not know when that something will come. Warren Buffet phrases it like this, “all the giddy participants plan to leave the party seconds before midnight. However, they are dancing in a room in which the clocks have no hands.” Overall, riding the ZIP and APT earnings fever with a modest profit target should increase your chance of leaving before midnight.

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick McLoughlin, Senior Manager of YIG

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