In today’s Money Morning…appetite for risk…what does it all mean for you?…you may as well use that to your advantage…and more…
Yesterday, Afterpay Ltd [ASX:APT] added $3 billion to its market cap.
Bringing it just shy of its recent all-time high of $122.09, and no doubt making shareholders very happy in the process.
So, what was behind this latest surge?
A competitor, actually…
Investors decided to bid up Afterpay after its main US competitor finally debuted on the NASDAQ. A company known as Affirm, which is led by PayPal co-founder Max Levchin.
Affirm had a standout first day of trade. Closing 98% above their IPO price, giving them a market cap of US$23.6 billion (AU$30.4 billion). Which was just shy of Afterpay’s own market cap.
For local investors this drove home some important points.
First and foremost, it finally showed that the US market is ready to embrace the ‘buy now, pay later’ (BNPL) phenomenon. An investing trend that hadn’t really caught on until this point. At least, not visibly.
That is a fantastic sign for the sector as a whole, because these are very capital-intensive ventures, relying on cash to drive their growth agendas.
And secondly, because Afterpay is more established and more experienced than Affirm, they are in the box seat. Controlling a higher market share of customers, as well as the perception of a better platform.
Therefore, it was only natural that investors drove Afterpay shares higher in response. Setting the stage for a classic showdown between two high-flying rivals…
Appetite for risk
Now, we’ve talked a lot about Afterpay in Money Morning.
How could we not, given its explosive rise in 2020? It might as well be our Tesla — a hot tech stock that has soared into legitimacy.
Whether you think this success will last or is merely a temporary bubble waiting to burst though, is in the eye of the beholder. For instance, personally, even I’d be hesitant to invest in Afterpay right now.
Sure, they certainly have a captivating growth narrative.
However, they also have a monstrous valuation relative to current sales.
People are paying a truckload for the future potential of this BNPL pioneer. Which may or may not reach the kind of levels that some are expecting.
It’s a tough company to evaluate.
Having said all that though, I don’t think we’ll truly see Afterpay disappear. No matter what happens from here on out, I think they’ve brought about too much disruption to ‘fail’. At least in the medium term.
More importantly though, I think Afterpay is a stock that every Aussie investor should watch. Even if you have no plans to buy it, like me.
Because whether they succeed or fail is irrelevant.
The true beauty of a stock like Afterpay is that it is a barometer — the kind of company that can give you relatively good picture of the market’s appetite.
And right now, given the fact that Afterpay is right on the heels of its all-time high (again), it is clearly a risk-on environment.
I mean, any time a stock — especially a $30 billion market cap stock — goes up by almost 10% in a day with no news, you know the market is heated. A sign as to just how voracious investors’ appetites are right now.
Granted, this appetite isn’t necessarily smart, or rational. But it certainly is bold, and for anyone who follows the small-cap sector, that is a good omen.
For the bold
Keep in mind, when I say this is a good omen, I’m not just talking about BNPL either.
Looking at the fintech space, beyond Afterpay, there is clearly still a lot of interest. With a range of copycat competitors, as well as some genuinely innovative projects. All of which I expect will benefit in some capacity from this recent and ongoing exposure.
Growth is clearly what investors are craving, and small-caps offer up some of the best avenues to find it.
Beyond the fintech scene though, there are also plenty of other avenues too. With both the tech and mining sectors also attracting plenty of attention of late.
I already talked about lithium yesterday, and there are plenty of other examples out there. Further reinforcing my assessment that we’re in the midst of a ‘risk-on’ market.
So, what does it all mean for you?
Well, for starters, it means that now is a fantastic time to be an investor, especially a small-cap investor.
And while it can be precarious, as it always will be, the market is clearly still infatuated by growth. Still pushing aside any hope for traditional value investing.
Though it could flip at any moment.
But, I’m willing to bet that if it does, the first place you’ll see it is in Afterpay. The lightning rod of the ASX.
So, once again, even if you’re not buying — it could pay to keep a close eye on this captivating stock.
Because whatever happens to the ASX over 2021, you can bet Afterpay will be involved in some way. It is far too prominent not to be at this point.
You may as well use that to your advantage…
Editor, Money Morning
Ryan is also the Editor of Australian Small-Cap Investigator, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.