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The market loves Afterpay, but how long will the euphoria last?

The market loves Afterpay, but how long will the euphoria last?

Just 12 months ago, Australian payments company Afterpay Touch (ASX:APT) was trading at $2.95. Today its shares are almost five times higher. With its entry to the US, many investors believe there’s only blue sky ahead. But I’m not so sure.


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Roger is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Hi Roger – Since the time of this article, AfterPay touched AUD 92 & is now at AUD 76 (has lost some steam!)- What’s your observation? For u, it was overvalued at AUD 9- How do you look at it now? Just curious to know.

  2. Has anyone looked into the capital structure to understand how this massive growth projection can be internally financed, without new debt and without more capital?
    If growth has to be, in majority part, funded by more debt and/or more capital raisings, then the balance sheet ends up either highly leveraged or shareholders get horribly diluted and the P/E of 50 never bears fruit all the while the business continues to chase growth.

  3. Well, I’m along for the ride. I’ve made a small ‘widows mite’ investment. This could be my ‘100 bagger’.
    Whilst it’s not an investment I’d want Montgomery punting too much of my Montgomery Funds money on, I’m happy to have a little ‘satellite’ investment in this.
    My eye opening moment came when I went to lunch with two young married women in our company – I asked them if they were aware of AfterPay. Turns out, both of them were avid users. For me, that was a sort of Warren Buffet, “keep your eyes open when you’re in the supermarket” moment.

    Roger, competition? A list of hyperlinks doesn’t a Summer make. If you actually do some looking at what Australian and US stores are offering, AfterPay has next to zero competition currently.

    In Australia, I’ve not seen anything that has swept the retail scene like AfterPay – it is EVERYWHERE! A bit of ZipPay, yes, but it seems AfterPay is sweeping the ‘competition’ away.

    Obviously these guys are ‘executing’ with military precision, they are getting retailer signups at an astonishing rate, and the shopping millennials LOVE the product.

    The fact that they’re not the first-to-market, and the fact that the ‘concept’ can be copied, may, in fact, not matter. REA and Carsales and SEEK can also be copied, but it’s too late, because those incumbents have done it too well. And that, could well be the same with AfterPay.

  4. Thanks Roger! Great research
    “In 2017, Afterpay’s net transaction margin was 2.5 per cent.” – cycled 6x a year is 15% return, no?
    Talking to users and a reason why I’m still bullish, its not that users can’t get credit, its that they don’t want credit, even in a low interest environment! I see an uptick in interest rates as actually broadening APT customer base beyond the ‘millennial’ target. Smaller purchase amounts mean people are less likely to default on a $200 purchase paid for in 2 months than the $2000 they racked up over 10 months while not having to make a payment.

    • Woolworths turns its stock over even faster, these are also at thin margins so 1) it is still low margin and 2) WOW is less sensitive to the economic cycle. Neverthless we’ll put your assumptions (‘increase in interest rates being beneficial to demand’ and ‘less-likely-to-default customers) on the record and watch with interest.

  5. james williamson

    Its a great product that has cracked the code and seems to have taken off amongst a crowded marketplace and like a lot of tech startups, no one really understands why or how they did it.
    As someone living in the US currently, there appears to be no direct competitor I’m aware of (not saying much as Im not really in the womens online stores much) however the credit card/loyalty card market is a lot more comeptitive with most medium/large chains offering their own branded credit card with special discounts. The catch is the time it takes to get approval and that it affects your credit score, which is a lot more important (cant even get the power connected without passing a credit check!) so an Afterpay option that doesnt affect credit scores and is fast could make a big impact.

    • Thanks James, The post lists many competitors and if you look at each offerings website you will find very long lists of retailers adopting them. SO when you say there appears to be no direct competitor, and given AFterpay has only signed a small number of retailers thus far, it suggests you simply haven’t visited a large enough sample of stores.

  6. Besides the growth already factored in and thus, a massive downside with no upside if it doesn’t (or does) go right, I don’t see how it is able to ‘raise prices’ or what the economic moat is, i.e. why would people choose that over another (essentially) credit provider ?

    Money is a commodity, they’re essentially a price taker, not a price maker.

    • And as competition intensifies the economics of factoring businesses are brought forward. We could be completely wrong on this one, but there seem to be too many negatives for us to get excited at these prices. Note we did reject it as being too expensive when it was half or a third of its current price!

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