Shares of ‘buy now, pay later’ giant Afterpay Touch Group Ltd [ASX:APT] have been on a downtrend since UBS issued a ‘sell’ recommendation at just half the current share price.
Afterpay hit a 52-week high of $37.41 on 15 October — the day before the note from UBS.
But the Afterpay share price has shed more than $10 since then, down to $27.13 at time of writing:
The 27.5% drop seems to reflect investors accepting UBS’ bearish outlook.
They fear potential regulation of BNPL platforms could affect Afterpay’s profitability.
This was all but confirmed when the RBA announced a review of the BNPL sector on 18 October.
Afterpay shares have struggled to reach $30 since.
Does this mean a downhill trajectory for Afterpay here on out, or is now a good time to buy?
Afterpay attempts to quell market concerns
Afterpay issued a media response shortly after the RBA’s BNPL review announcement.
Afterpay clearly aimed for their response to alleviate the 7.3% drop in share price that the RBA’s announcement triggered.
In it, the company noted that contrary to popular belief, they aren’t currently subject to an RBA inquiry or review.
They also reiterated the value the business model provides to both customers and merchants.
Afterpay has a ‘high-quality and frequently returning customer case, with low outstanding balances and industry leading loss rates.’
As of their FY19 results, Afterpay are sitting on a gross loss of just 1.1% of underlying sales. Late fees make up less than 1% of underlying sales.
For merchants, Afterpay provides ‘material value’ through their digital platform.
It creates a ‘marketing channel to millions of hard to reach core millennial and Gen Z consumers’, which translates millions of leads directed at small to medium businesses.
Afterpay also guarantees upfront payment to merchants and covers fraud and non-payment related risks.
This is likely their argument against the RBA’s concern regarding the cost to merchants for providing the Afterpay service.
As mentioned in a previous update, the future of the BNPL sector looks bright in the long term.
Afterpay’s FY19 results showed active customers grew by 130% year-on-year. They also reported a 140% increase in underlying sales.
So while market sentiment is low, there is genuine future potential for the company.
And we aren’t the only ones who see this.
APT still a ‘buy’ for some
Not all analysts are bearish on Afterpay.
Morgan Stanley currently has a price target of $44 on Afterpay and a base-case valuation of $39.
According to the Sydney Morning Herald:
‘Morgan Stanley is a believer in the company’s ability to make a sizeable impression in the US. Indeed it sees the US market as ripe pickings for Afterpay and points to evidence there has been significant curtailment of credit to non-prime customers (like college students) over the past 10 years and fintechs like Afterpay have the opportunity to fill that void.’
Similarly, Goldman Sachs has a price target of $42.90 on Afterpay shares after reviewing their user patterns:
‘74% of [US] transaction value in June 2019 was from returning customers and that ANZ users who have been on the platform for three years are transacting over 20x p.a.’
According to the broker, this shows ‘resonance with users…drive turnover…and strong operating leverage.’
Our thoughts on Afterpay
Here at Money Morning, we are still optimistic about Afterpay.
That said, the looming threat of an RBA BNPL review will likely continue affecting their share price in the short term.
In the uncertain limbo, bearish investors will fear what a potential surcharge will do to current and future Afterpay customers.
But Afterpay believe that even if the option was there for merchants to pass on the provider cost to customers, they wouldn’t take it ‘as it is generally perceived negatively by consumers’.
Indeed, in the RBA’s most recent triennial survey, less than 2% of all payments in Australia incurred a surcharge.
All in all, it doesn’t appear this hurdle will impact Afterpay — or the BNPL sector as a whole — that much in the long term.
But it will be interesting to see how it all plays out.
Imogen van der Meer,
For Money Morning
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