The rise and rise of Afterpay

Emanuel Datt

Datt Capital

We got lucky. A few days after our last wire, discussing two stocks to watch, one of them, Afterpay, released a positive business update and the share price exploded, gaining in excess of 30% within a matter of days. Reading market commentary, a common perception is that Afterpay is overvalued at its current price. The real question is: how do you value a company that is growing at an almost exponential rate?

We consider the major growth avenues below:

  • AU in-store - Afterpay's market share is currently only 0.5% in this $160+ billion segment. There is still tremendous scope to grow considering the product has achieved virtually mainstream recognition in the AU market. We anticipate that Afterpay can capture, over time, a low single-digit share of this market.
  • The USA online retail market is growing steadily with a total size in excess of $200 billion. 
  • USA in-store non-food retail market is the largest in the world, with a size in excess of $1.5 trillion.
  • UK, EU expansions - These longer-term potential markets in terms of size are multiples of the Australian market.

Afterpay also possesses a number of sources of unquantified value, namely:

  • Its database of credit information. In many cases, Afterpay has the 'first touch' of millennials in contrast with credit assessment/agencies; so this data is extremely valuable.  
  • We consider there is significant scope build ancillary businesses/income streams utilising this information
  • The network effects and influence that Afterpay possesses with consumers is unquantifiable from a financial perspective. It has managed to build a strong brand identity, especially considering the company name has entered the Australian millennial vernacular ("Afterpay it"). 

We consider Amazon to be a close comparable to Afterpay due to its historically large growth potential, gross sales and slim margins. Amazon, up until the start of 2016, traded at an average Price to Sales (P/S ratio) of 2 times. Of late, it has traded higher due to recognition of its market dominance and ability to enter new markets.

We consider the P/S ratio a reasonable valuation heuristic for a company experiencing rapid growth above 100% per annum like Afterpay. We would consider a P/S ratio of 1 times to be reasonable for an ASX listed company however, if a dual-listing was pursued in the US markets (for example, on the NASDAQ) we would consider a P/S ratio of 2 times to be most reasonable in that particular market.

We note the latest business update disclosed the annualised gross sales were running at circa $3 billion. We anticipate Afterpay in 12 months to be achieving minimum annualised gross sales of $5.5 billion, with the US contributing over $1 billion to this figure. Using the P/S ratios above, this equates to a share price range of between $25 and $50 assuming no further equity is raised.

We applaud the efforts and decisions of management to date and are enjoying watching the evolution and growth of another great Australian company.

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Emanuel Datt
Datt Capital

Emanuel is the Principal of Datt Capital, a boutique Melbourne-based investment manager focused on identifying high growth and special situation opportunities.

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