Afterpay: Don’t focus on the sideshow
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.
“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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