Australia | Sep 24 2019
Increasing customer usage and avenues for growth both vertically and internationally have put Afterpay Touch in the box seat in the Buy Now, Pay Later segment.
-Could investors be underestimating the growth potential?
-Heavy investment in growth making it hard to forecast short-term earnings
-Business model does carry credit risk that may increase in economic downturns
By Eva Brocklehurst
Afterpay Touch ((APT)) has enjoyed rapid growth in the Buy Now, Pay Later segment and remains a market leader in Australasia, amid increasing usage of its product and avenues for expansion.
Citi estimates that consumers using Afterpay for more than three years are now using it twice a month. The US business saw over $1.7bn in total transaction value in June and customer numbers are now over 2.1m.
UK customers have grown to over 200,000 as of August, overtaking US customer numbers at the same point in the period of operation. Bell Potter also notes the success in the UK, through Clearpay, is in line with the US expansion trajectory.
The company recently formed a new partnership with Visa, which will not require Afterpay Touch to provide credit but which management believes could benefit merchant integration.
Citi suspects investors could be underestimating the growth potential, amid ongoing penetration of existing markets, new verticals and new markets, while initiating coverage with a Neutral rating and $33.70 target because the investment cost could be higher than many expect as the company expands internationally.
Moreover, increasing competition could negatively affect industry returns and regulation uncertainty is also a hindrance. Of note, the interim AUSTRAC audit report on the company is due by September 24.
Wilsons is encouraged by the fact over 95% of sales come from existing customers, reflecting strong loyalty and future revenue retention, but will closely monitor the rise of various competitors, including ZIP Co ((Z1P)) and Humm ((FXL)).
The broker, not one of the stockbrokers monitored daily on the FNArena database, has a Hold rating, with a $27.48 target, believing the valuation is full. That said, Wilsons expects trading momentum should support the stock even in the face of stretched assumptions being discounted in the price. This implies investors should be at least market weight.
E-commerce
Afterpay Touch appears to be riding the secular growth trend in e-commerce. Merchant sales are likely to double over the next three years, primarily because of increasing usage by existing customers and in-store roll-out.
A modest increase in the penetration of online retail is also expected, driven by increased frequency of usage and growth in e-commerce. In-store was the fastest-growing channel in FY19 and Citi estimates this represented around 26% of merchant sales in Australasia in June.
Afterpay Touch is increasing the investment in its platform and product functionality, expecting to release new features such as variable upfront payment, cross-border trade and new data services for merchants.
Bell Potter remains cautious, given the heavy investment that is occurring, and finds it hard to forecast short-term earnings, yet remains confident in the overall trajectory of the business. The broker, also not one of the seven, has a Buy rating and $38.41 target and assesses Afterpay Touch is onto a winning formula as it enjoys rapid growth across key markets.
Credit Risk
Citi points to widespread client interest in the stock, given the growth in the sector to date and the potential in international markets. However, the broker suspects opinions and outlook will vary, depending on the individual investor's view of what Afterpay Touch stands for.
Does Afterpay Touch represent a brave new way to pay, particularly for new generations? Other issues for analysis centre on whether Afterpay Touch can be defined as a marketing platform/channel for merchants and also whether it is a short-term lending solution that can withstand the credit cycle.
The broker highlights the business model carries credit risk which could also increase during economic downturns. Still, in the near term, Citi expects the share price will be driven by customer additions and merchant sales growth.
The broker assesses the FY22 target of gross merchandise value of over $20bn is conservative, estimating merchant sales will grow at 70% compound, reaching $26bn by FY22. This should be underpinned by penetration of the US & UK markets, and in-store growth & new verticals in Australasia.
There are two Buy ratings and one Hold (Citi) on FNArena's database. The consensus target is $33.52, signalling 4.3% upside to the last share price.
See also, Afterpay Touch Steams Into The US on June 7 2019.
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