Afterpay: Don’t focus on the sideshow

Livewire Exclusive

Despite a sharp fall in October, Afterpay is still the ASX200’s top performer over 12 months, with a remarkable gain of 166%. Speaking at a recent event held by IRESS and Livewire, Andrew Mitchell from Ophir Asset Management discussed the outlook for the stock.

While the company is facing regulatory scrutiny here, Andrew told the audience:

“Don't get focused so much on Australia. Australia is the side show to a huge phenomenon that is really outperforming everyone's expectations in the U.S. in terms of its growth”.

Read, or watch his full responses below, including why he thinks Afterpay is on its way to becoming a global success.

Edited transcript

“To the point: they're in the room with ASIC. We think the Senate inquiry is a side show. You really have to focus on ASIC. We've looked globally at examples where this has happened, similar things have happened before. If they go under the Consumer Credit Code, we're expecting, you'd probably have a 30% dip. Then it tends to have the same growth trajectory. That's our best guess. We think it's a 50-50 line ball whether it does, or it doesn't.

The key thing is, don't get focused so much on Australia. Australia is the side show to a huge phenomenon that is really outperforming, I think, everyone's expectations in the U.S. in terms of its growth. Part of the reason why it's down at the moment is, people are worried about the margin that they're earning in the U.S. That's another side show. They are deliberately putting the price very low to make sure they get maximum traction in that market so they can grow very fast.

We were lucky enough to have a meeting with a very well known retailer that people in this room would know, that's recently started to use Afterpay. They said, "We were so surprised how cheap it was", to my point. Afterpay is coming in there with a really low price. But also, they've been surprised in terms of what it's done for the basket size, and what it's done to the online. It's driving their online. They're now going to the U.S. market talking about their online strategy, something that they weren't really doing before. It's actually being led in the background by Afterpay.

It is very early days in the U.S. It's not out of the risk zone, but it is exceeding expectations. Don't worry so much on the margin. They are pricing it low. That's where the value in Afterpay is. The U.S. is a market 10 times the size of Australia. They can get traction there. That's where the growth is, and this stock has come off a long way. We wish we sold more. Have halved our weight. We wish we sold more, but again, the risk is that you sell too much, and then you miss the bigger show.

I can't tell you what's going to happen over the next three, four, five months when ASIC is sorted out, but my inclination is that this business is going to be a global success.

We haven't seen this sort of business do this from Australia internationally before. It's quite exciting to be a part of a company that's doing so well on an international stage."


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Simon James

Part of ignoring the noise is actually trying to measure objective things. It is interesting to compare the total website visits of all the USA companies they listed in their last presentation, with big Aussie retailers like Target or Kmart. You will find that things like Forever 21 and UrbanOutfitters are much, much bigger in site traffic. Both world top 30 for clothing as far as websites go. This is borne out by the ASX commentary about the USA signed up retailers vs the size of the entire Aussie equivalent market. You can also measure the traffic to the Afterpay payment portal from each website and see the likely uptake on things like KylieCosmetics and EB Games (a very big % number for this one). It is hard not to conclude that it is going totally viral. But don't take my word for it, do your own research and seek independent financial and legal advice. This is my inexperienced opinion only.

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Brandon Kibby

The biggest problem facing Afterpay is the AFR and Fairfax. I can't believe how Fairfax picks up on the smallest of problems and puts them into a headline. What shorter is paying them? Since the AGM two negative headlines. Nothing about signing up 450,000 customers in 6 months. Nothing about outperforming Amazon on Black Friday. Nothing about this could be one of the countries greatest success stories since CSL. The AFR is an absolute disgrace and should be outed. Who is paying the ferryman?

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Michael Bishop

Well said Simon!

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