No convincing some on Afterpay value and growth

Is the market pricing in excessive growth for Afterpay without considering the risks?

Afterpay currently has 40,000 merchants signed up. Picture: AAP

Afterpay’s fulsome business update to the market has failed to convince the doubters, with UBS sticking with its “sell” rating on the company despite plenty of good news on offer.

The buy now pay later (BNPL) darling on Wednesday told investors that it had signed up an average of more than 15,000 new customers a day in October, with 17 per cent of the Australian population now using the service.

It now boasts 6.1 million active customers globally, and almost 40,000 active merchants. Meanwhile, over 95 per cent of Afterpay’s gross merchant volume (GMV) is from returning customers.

However, Afterpay’s biggest doubter in the market, UBS, remains unconvinced.

READ MORE: How long can Afterpay defy the critics? | NY fund manager warns of risks facing Afterpay | Afterpay defends ‘no surcharge’ policy

UBS analyst Tom Beadle, who initially set a price target of $17.25 for Afterpay in October, said the key risks remain intact for the company. UBS has a “sell” rating on Afterpay with a price target of $17.60.

“We think the market is pricing in excessive growth for APT without factoring the risks. APT’s success is likely to attract the attention of competitors and new entrants,” he told clients on Thursday.

Over 95 per cent of Afterpay’s gross merchant volume is from returning customers.

The barrage of information from Afterpay was also accompanied by news of a number of strategic agreements, with eBay and Mastercard, and the $200m investment into the company by US technology fund Coatue Management.

Under the agreement, the $US17bn specialist data analytics fund will invest in Afterpay at $28.50 per share. Afterpay shares were up 6.3 per cent at $31.16 in afternoon trading on Thursday.

Mr Beadle said Coatue’s entry was a surprise.

“The key surprise was the $200m placement to Coatue, given our view that as at June 2019, we estimate that Afterpay’s balance sheet and existing debt facilities were theoretically already capable of supporting around $20bn+ in underlying sales, or roughly $27bn if Afterpay funded 70 per cent of its receivables through new debt facilities.”

“The exact use of the proceeds is not yet clear – Afterpay stated use is for targeted global platform expansion opportunities beyond midterm plan deliverables,” he said.

Some supporters

However, Afterpay does have its supporters in the market, with Citi and Bell Potter warmly welcoming the latest news.

Citi analyst Siraj Ahmed has maintained his “buy” rating on Afterpay, saying the fintech is adding customers at a faster than expected clip and making more from transactions.

With Afterpay moving into a busy retail season, both in Australia and the US, Mr Ahmed expects the company to perform strongly in the US.

“We forecast US gross merchant value (GMV) to double from $700m over the first four months of H120 to $1.5bn in H120.”

“While this implies a material step-up over November-December, we see this as achievable given accelerating US customer growth (9k customers added per day in October), key retail trading period (Black Friday, Cyber Monday); and recent additions of marquee retailers,” Mr Ahmed told clients.

Meanwhile, Bell Potter’s Lafitani Sotiriou is equally impressed with Afterpay’s update, raising his price target 9 per cent to $45.50 and reiterating his “buy” rating.

According to Mr Sotiriou, Afterpay’s agreement with online shopping giant eBay that will see the service offered to Australian eBay users could be a “game changer”. Afterpay has also announced a strategic agreement with Mastercard in Australia and New Zealand (ANZ) to deliver more efficient merchant services.

“We see this as a step-change in the BNPL space, to put this in perspective, Afterpay currently has 40,000 merchants signed up across its four markets, and eBay is set to deliver 40,000 small to medium businesses in one hit.”

“This first step by eBay to offer Afterpay may be a precursor, if successful, to an expanded global relationship with eBay,” he told clients.

Meanwhile, Morgan Stanley analyst Edward Pham has pointed to the final auditor’s report to anti-money laundering watchdog Austrac, which will spell out if Afterpay is in breach of compliance, as the next price catalyst.

While the audit poses a material risk to Afterpay, Mr Pham said the company is well placed to cop any hit.

“The Austrac investigation has been one of the most commonly raised concerns in our meetings with investors.”

“As such, we think there is a discount on the stock price and the removal of the Austrac overhang should see the stock react positively - even if a $42m penalty (maximum under the law) is incurred.”