“We like the buy now, pay later space, as we think it’s a new age payments system that appeals to younger generations, similar [to] credit cards to our parents,” said Matthew Wilson, a director at Evans and Partners.
“Valuation is very hard to justify on traditional metrics, but if you think the credit card market globally is worth $US1 trillion in market cap by adding up Visa, Mastercard, Amex, etc, then why can’t buy now, pay later be somewhere between 20 and 30 per cent in time going forward?”
Evans and Partners’ preferred picks are Sezzle and Afterpay, although Mr Wilson said Zip is strong with Quadpay in the US, where buy now, pay later is only 1 per cent of e-commerce transactions, compared to nearly 20 per cent in Australia.
“So if the US replicate that penetration, there’s lots of growth for a market 26 times the size. The only issue with Zip is it’s got more traditional unsecured consumer lending, which is a bit more capital intensive.”
Einhorn used his quarterly investor letter to savage the twisted influence of passive funds and retail investors on equity markets. According to Mr Einhorn, both have helped create a tech bubble.
Mr Einhorn complained passive funds are no longer price takers from active investors who set a market by determining intrinsic value, but in fact price makers through the force of their inflows.
Others targeted by Mr Einhorn include what he described as a new group of money managers who ignore intrinsic value in favour of chasing momentum stocks popular in the public’s imagination.
He partly blamed these trends for the losses in his short portfolio.
Other short sellers like Dr Michael Burry, who famously called the subprime mortgage crash in the US, have warned index funds will cause the next crash as regulators ignore valuation risks building in the system.
Dr Burry has said index funds are analogous to a theatre drawing in more and more crowds as the show is good, but when a black swan comes the emergency exit doors are the same size.
Prominent Australian investor Alex Pollak of Loftus Peak said he empathised with Mr Einhorn.
“We’re not in a post-valuation world, very much not, and because some things go up so fast that doesn’t mean valuation isn’t relevant, actually it’s more relevant than ever, because some of this stuff is trading on silly numbers.
“I tip my hat to people short selling because there’s plenty of value to be sold short, and plenty of companies that are overvalued.
“But they’re not all tech companies, some are car companies, some have been in business for 100 years, but are about to have their paradigm shifted.”
Mr Pollak, whose Global Disruption Fund returned 40.5 per cent in 2020, cautioned over elevated risks betting against companies with brilliant products like iPhones or electric cars.
“We held Tesla all the way up, but we’re not short because it was such a great product.”
The fundie also warned buy now, pay later has no sustainable competitive advantage in his view. “If you look at the electric car relative to the petrol engine car it’s a great product, is buy now pay later relative to existing financial services a great product? Not so much.”
The headwinds short sellers and value investors face may still reverse, according to Mr Wilson. “Central bank liquidity has arguably been in place since 1987 when Greenspan originated the put and it’s gone through different waves,” he said. “We’re in what appears to be an extreme wave at the moment.
“It’s not just short sellers finding it difficult, any institutional investor that has a fundamental-based process is struggling with some valuations in the market.
“Whereas retail is having a big play, as they don’t think about valuations like an institutional investor.”
