Battered Afterpay a bellwether for buy now, pay later

How Afterpay survives the bodyblows it’s copping will tell us plenty about the market it wants to dominate.

Afterpay founders Anthony Eisen and Nick Molnar. Picture: David Geraghty

Consumer finance phenomenon Afterpay has survived what might have been another body blow — the latest scare is an apparent competitive threat from credit card titan Visa.

This follows unwanted attention from the “payments police” at Austrac.

Afterpay finished Monday’s session down about 3 per cent, but for this highly volatile stock 3 per cent is barely a blip on the screen.

On closer inspection the Visa announcement hinges on the retailing industry taking up the card company’s offer of “instalment plans” — industry analysts suggest this is unlikely to succeed quickly. Rival Mastercard has already been dabbling in the instalments area for years with limited success.

But the bears — and shorters — are out there.

For doubters of the Afterpay story the biggest fear is not that a global finance group will somehow focus on the sector and spoil the party. Rather, the major concern is what will the Austrac examination throw up.

Bigger fish than Afterpay have paid highly for trouble with Austrac, including Commonwealth Bank, which was handed a $700 million penalty only a few months ago.

Ron Sharma of Tammin Asset Management is a unique voice in the debate around Afterpay since he is both expert in the stock, having invested in it for his fund, but also independent in his view because he sold out of the company after last month’s corporate manoeuvres, which saw founders Nick Molnar and Anthony Eisen take $100m out of the company.

Sharma says Austrac is the key issue inside Australia, while overseas the major issue for Afterpay is new competition already emerging in the same space.

“Afterpay does not offer a particularly high competitive hurdle, rivals are going to emerge.

“Everyone is talking about Visa but I would be taking a much stronger look at operators such as Swedish finance player Klarna.”

Afterpay has recently bet big on cracking the US market where it already has more than a million clients.

Klarna is also intent on taking on the US market, but as Sharna suggests, “the one thing we discovered with the Visa announcements is the sheer scale of this new business — Visa is talking about a $US1.2 trillion market — this is not a situation where you have a winner takes all, there could be many winners.”

The ability of Afterpay to withstand these rolling scares at home and abroad is crucial because Afterpay carries on its shoulders the hopes of both the “buy now pay later” sector and the broader tech segment of the ASX.

As fund manager Martin Hickson of the Wilson Asset Management group said in a recent report: “Afterpay is having strong momentum in the United States with a number of large retailers such as Urban Outfitters publicly endorsing the company.”

But the WAM manager also made the point that many local fund managers invest in Afterpay knowing it vulnerable to regular sell-offs.

Commenting on the so-called WAAAX group (Wisetech, Appen, Afterpay, Altium and Xero), Hickson suggests: “Australian high growth stocks such as the WAAAX are now the most overvalued in the world.”

The WAAAX group of stocks are still trading about 25 per cent higher in relative terms than high growth stocks on Wall Street.

Meanwhile, we will have to wait until August to see what Austrac does or does not find at Afterpay.

The Australian Securities & Investments Commission has ­ordered the appointment of an external auditor to examine the company’s compliance with anti-money-laundering legislation after what the regulator describes as “a period of engagement with the company”.