Is Afterpay still a ‘buy’?

Patrick Poke

Livewire Markets

From a $165m micro-cap, to a $9.2b behemoth in just three and a half years, Afterpay’s rise to stardom has been nothing less than meteoric. For investors in the IPO, the returns could only be described as life-changing, with the share price going up by a multiple of 37 in that time. But success breeds doubters, and the obvious question on many investors’ lips is; does the stock still have room to run?

I recently reached out to three investors who have been holders of the stock for some time to find out if they’re still bullish following the recent run in the stock price. Responses come from Dean Fergie, Cyan Investment Management; Emanuel Datt, Datt Capital; and Michael Frazis, Frazis Capital Partners.

It's all about timeframes

Dean Fergie, Cyan Investment Management

Ah, my answer is…...it depends on the timeframe. Let me tell you a story.

I met up with Nick Molnar in the US in August 2018 and came back so excited about the Afterpay roll-out into the US that, on my return, I famously quoted to my business partner, Graeme Carson, that “Afterpay will never trade below $17 again.” We made a bet in which I had to buy him one dumpling for every day that that did not happen. I owe him 93 dumplings. My point is that these hyper-growth stocks are extremely volatile, and you can be very right or very wrong depending on a timeframe.

Does APT look ‘cheap’ on traditional metrics? No.

Do houses on Sydney harbour ever look ‘cheap’? No.

Is the company worth more than A$8bn right now?

Afterpay is a proven, successful, scalable, global payments business that it almost certainly going to continue growing strongly into massive international markets such as the US and the UK where it currently only has a miniscule market share. Even if APT is not worth $8bn today, on its current growth trajectory, it will only be a matter of time before it is. And that is a company worth owning.

An enduring value proposition

Emanuel Datt, Datt Capital

Earlier this year, we spoke to a retail manager of a chain store located in a major Melbourne shopping centre. They claimed around 60% of store transactions by volume are via Afterpay with the 18-35 years of age demographic being especially heavy users. Users expect Afterpay to be available as a payment option and prefer to use the service rather than a debit card. Merchant support is said to be vastly superior to competing services. The individual also said that she uses Afterpay 'automatically' instead of a debit card when available. She has a preference for stores that offer the service. This for us is a clear indication of Afterpay's sustainable and enduring value proposition for users.

We consider Afterpay an essential stock for any long-term portfolio, without being too fixated on a particular entry price. Its relatively seamless entry into the major US and UK markets has been a testament to the quality of the company's strategy and team.

The retail market in the company's 3 core geographies is in excess of $6 trillion in retail spend. Company has guided to a system total transaction value of over $20 billion per annum by FY22. This is approximately 3 times the current estimated annual TTV.

We note that the estimate is based only on the company's current market geographies and does not account for additional new markets that maybe entered in the interim. Nor does it include any potential for extensions and enhancements to core product. We also note that the company tends to under promise and over deliver in terms of guidance, so we would not be surprised to see this beaten.

We believe that Afterpay has the potential to reach the upper range of our previous guidance over the next 12 months, especially if a few key catalysts should occur – as we’ve discussed in prior articles.

200,000 customers in five weeks

Michael Frazis, Frazis Capital Partners

Until fairly recently, it was an open question as to whether Afterpay would succeed in the United States. They’re now in over 10% of online retail stores in the United States, so the answer to that question is increasingly clear.

The relevant aspect with Afterpay is how many customers are signing up and how often they’re using the platform. They may only have 200,000 customers in the United Kingdom, but these joined in their first five weeks of operations. Extend those customer growth rates in the US and UK over the next three years, and then consider these millions of new customers are likely to purchase more and more each year, and you’ll be able to see the scale of the opportunity.

Furthermore, Afterpay will continue to weed out the bad credit week by week and be left with a rapidly growing customer pool of higher and higher credit quality.

I’d hate to disappoint those who missed this opportunity or recently sold… but financial indicators, public web data, and customer acquisition rates all suggest the number of customers, the spend per customer per year, and the net interest margin, are likely to increase several-fold over the next few years. These are the value drivers, and the message they are sending is crystal clear.

In conclusion

While Afterpay bears are unlikely to be convinced to jump on board at this stage, for those who are interested in these types of investments, the message is clear; there's still plenty of potential. Clearly, it won’t reproduce the same extreme returns that it’s seen in recent years – that would result in a market cap of $340b, and have it knocking on the doors of the largest companies globally – but that doesn’t mean that there’s not still potential upside. 

For an alternative view, Lucas Goode from Investors Mutual takes a more skeptical view here.

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Patrick Poke
Managing Editor
Livewire Markets

Patrick was one of Livewire’s first employees, joining in 2015 after nearly a decade working in insurance, superannuation, and retail banking. He is passionate about investing, with a particular interest in Australian small-caps.

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