Stands to slow clap... This is exactly what I needed to read; analysis of the actual company and not the share price moves. Brilliant.
The issue I have with this company is they make losses. As the receivables book increases the losses increase. They don’t appear to have a business model that works. They are dealing with the most high risk sector of the lending market which finance companies, credit card companies and banks don’t want to touch. Very similar to the 80’s when Finance companies went broke from lending small amounts to individuals who couldn’t get credit elsewhere. Collecting small amounts of money is just not economic, due to the difficulty in contacting the borrowers. GLTA
Let me guess .Overweight APT . Gulp!
sincerely appreciate your sharing this analysis Damian. thank you
This is an unprofitable model in the best of times - record low interest rates and easy access to funding. The more customers they acquire and the higher the GMV, the bigger their losses. They argue that customers have brand loyalty, but the reality is retailers and customers are not wedded to any specific BNPL provider. Margins continue to get squeezed in a race to the bottom. Corona Virus has not been the cause of the rapid decline in share price, it has just exposed the flaws in their business model. With the big four banks only surviving as a result of govt intervention and credit market drying up, how can a business that relies on equity raises survive? With the looming recession ahead and the shift in sentiment away from over-valued loss making machines, I wouldn't be surprised if Afterpay 's days are numbered.
The various bank lines and warehouse facilities are available for as long as they are within covenants. The equity locked up in warehouse facilities is effectively ‘first loss’ in the structure.
Another observation, on such a polarizing stock. With exception of 3-4 notable Fundies who managed to get-out of APT at 2x to 4x higher prices; just about anyone who would ever buy the Afterpay narrative has done so. Other than existing holders doubling their bets (and hoping everything goes right), there's not many new investors available. If we look back to the Euphoric state of markets in Jan-Feb 2020, APT at $41 is surely the single best example of that euphoria in practice, after Tesla at $970. For those who shunned APT stock at $5/$10/$20 on the way up, the equation is a lot easier to pass on the way down, given all the Blue-Chip value that abounds today, and with a souring global outlook. Setting aside the >75% decline in share price will cause angst and redemption, and future index-adjustments. With an Equity market that has turned averse to most additional risk-premia (Debt, Size, Losses, Credit issues, Adjusted metrics). Afterpay will have to prove itself through this coming crisis, rather than investors pricing it for success with blind-trust. For the sake of Brand Australia on the global-stage, I hope APT proves me and any other doubter wrong. But the market is now clearly not willing to price it for Long-Term balance-sheet robustness and credit-worthiness till that becomes real and known throughout 2020 into 2021.
Thanks very interesting
Your article aged really well with Afterpay hitting $76 after the flash virus crash and you were right - no funding or debt issues.
Thanks, Simon. Hope the piece was useful to you at the right time. This research is typical of all work we do at ECP. Thanks to all commentators on this thread for your engagement.