Why Beforepay was set to flop

There were fire emojis on the front of Beforepay’s (ASX: B4P) prospectus, perhaps symbolic of its ASX debut on Monday. 

A -26.6% open to $2.50 before closing -44% lower at $1.91. 

A little bit late?

ASX BNPL stalwarts Afterpay (ASX: APT), Zip Co (ASX: Z1P) and Sezzle (ASX: SZL) all topped out in February last year, all of which are now down more than -50% from all-time highs.

Beforepay effectively boarded the titanic as it was sinking instead of when it was leaving the port.

Beforepay's business model is simple - in exchange for providing its customers access to a portion of their pay on demand, the company receives a fixed fee equivalent to 5% of the cashout. 

The Beforepay app also provides customers access to budgeting and financial awareness tools such as an automated bill predictor, historical spending analysis and transaction categorisation. 

To date, the company has over 125,000 active users with over $171m capital deployed. 

From a financial perspective: 

FY20

• Income: $44,784 

• Net loss after tax: -$649,987 

FY21

• Income: $4.5m

• Net loss after tax: -$18.77m 

The capital raising will enable Beforepay to ramp up marketing to grow market share in Australia.

The company also said it is "in the early stages of assessing its expansion strategy, with a focus on the US".

Priced to perfection 

The Beforepay IPO was valued at $158m at an offer price of $3.41 per share.

This values the business at 35 times FY21 revenue.

12 months ago, this would have been a perfectly reasonable valuation as technology stocks were running hot.  

Now, a player like Zip trades at just 5.5 times FY21 revenue.

If Zip was placed on a 35 times revenue multiple, its shares would be worth more north of $20.

Putting the companies side-by-side, Beforepay operates only in Australia.

While Zip, also being 7 times cheaper, has operations across 10 countries in North America, Europe, the Middle East and A&NZ.

Go figure.

The market was quick to critique Beforepay's valuation, given the -44% close on Monday.

What now? 

Beforepay has a short but sweet track record, with a compound monthly growth rate in its active user base of 25.3% between August 2020 and October 2021. 

However, the current hawkish interest rate environment does not favour fast growing technology stocks, especially BNPLs.

An uptick in rates could increase funding costs for BNPL businesses, placing downward pressure on margins. Rising interest rates could also create a far less appealing environment in which to raise capital.

Whether the current price marks an attractive entry point - only time will tell.