Afterpay (APT) – ASX

Today we look at Afterpay, the ASX’s market darling and top performer for the last few years. Is there still room to run on this stock, or is it overhyped?

Description:
A brief description of those who don’t know what Afterpay does. Afterpay pretty much is modern layby where consumers can pay for an item up to around $1000 in four installments over time, but instead of waiting for all payment installments to be completed before the item is obtained, the consumer instead gets the item on their first payment. It’s pretty much modern layby and millenials LOVE it. Not only that but it the market loves it as well, as it has been a market darling since its launch on the ASX.

How does the company generate revenue?
Currently the company generates revenues from Merchant fees, each time a customer uses Afterpay, Afterpay gets a clip of the transaction. You’re probably asking why would merchant’s agree to such a thing? It’s because Afterpay has proven themselves as a method to boost sales… so why not?
The second way Afterpay generates revenue is late fee payments, although this is different to a traditional payday lender as the maximum late fee of $68. Further revenue generators later on could be the use of the huge amounts of data it is collecting from it’s users (although for our purposes and analysis we will be just focusing on the previous two revenue generators).

Latest Developments:
Afterpay began in 2015 and has slowly built up an army of retailers and consumers within Australia and recently the US. The US expansion in 2018, was a major catalyst in Afterpay’s market capitilisation in 2018. As not only did consumer’s and retailers take a liking to the company, but it also continuously beat market expectations to how quickly consumers and retailers would adopt Afterpay’s methodology.
In the last 6 months, Afterpay has had a volatile ride in terms of it’s stock price. The key moments which have had a major impact on its stock price are as follows:
– October 2018: overall market decline in the stock market , share price begins dropping from ~ $17
– Mid October: Senate announces that they will be investigating Pay Day lenders such as Afterpay. This cause the stock price to tumble to ~ $11. ( For disclosure I did buy some at this point, as Afterpay is exteremely different to a typical payday lender)
– 2019: Market begins its rally
– Mid January 2019: Afterpay provices latest business developments in mid January causing a spike to $16 and a continuation of its rally
– Late February 2019: Finally in Afterpay’s last market update they provided (26 February 2019) was in line with my forecast of penetrating roughly 1 million customers in the US, alongside their continued customer growth in Australia.

Technical Analysis (Strong):
Currently the stock is trading with positive momentum inside the price channel shown below.

Technical Graph of APT (Source: Tradingview)

The stock has historically found its first support at the Main Trend Line and if that breaks then the 200 day Moving Average.

Fundamental Analysis (Poor):
For our analysis we used a bottom up approach to forecasting revenue. Looking at current consumer growth within Australia , US and the UK we forecast that consumers will be greater than 4.3 million by the end of 2019.
– Australia: Greater than 3.1 million customers

– US: Greater than 1.2 million customers

As per latest update by the end of FY22 $20 billion underlying sales is expected with net transaction margins c.2% . My estimates for 2022 based on current margins, revenue and customer growth is approx. $21 billion.

Current average spend per customer in FY18 in Australia was $50, I am forecasting this to grow overtime to between $100-$150, as Afterpay penetrates more retail stores and retail sectors.

OPEX costs are currently at 70% of overall Revenue and this has been kept constant across the 10 years. Although it will most likely fall over time, but I am being conservative with my analysis.

Taking the above factors into account i have conducted a basic 10 year DCF forecast to estimate intrinsic value of $17.20.

My DCF might be completely wrong and I welcome any feedback, at this time however it looks like Afterpay is actually overvalued and overhyped.

Moat/ Competitive Advantage (Strong):

Afterpay’s market advantage can be summarised below:
– First mover advantage, which has created a significant consumer base allowing Afterpay to snowball that effect. The company has a major foothold in the US, Australia and the UK and has a postive brand experience with millennials. As with most product/service once a customer is accustomed to a particular method they generally do not like to change provider, particularly if it meant signing up to a new payment channel which offered the same service Afterpay offers.
– Network Effect: As Afterpay grows, so does its network effect. Merchants that notice that their competitors have Afterpay will quickly follow suit and so on and so forth, until the majority of retailers and customers have signed up.
– Data: The amount of data gained by Afterpay about their customers and retailers would far outweigh their competitors entering into this space. Armed with this data they can be first to market with new offerings such as AI recommendations, loyalty programs and other business ideas to fight off its competitors.

Catalysts (Strong):
– Continued US market penetration, above market expectations as mentioned earlier in my fundamental analysis.
– UK market penetration, above expectations similar to that of the US. Expecting market penetration in between US and AUS, if the penetration exceeds that of the US, this could lead to another significant catalyst in the stock price.
– Entering the Asian market
– Uplifting of data capability and turning this into a revenue generating stream.

Risks (Neutral):
– New market entrants into this sector, although due to it’s first mover advantage there should be limited risk
– Further regulation from regulators, regarding Afterpay’s late policy fees and scrutiny over the payday lending sector. Although this is now low risk afterpay Afterpay’s latest market update clarifying this with the regulators.
– Lets face if the stock market hasn’t been doing great, technology stocks will be punished severely.


Shorting Interest (Neutral):
Currently on shortman.com.au as of 15th April 2019 , shorting interest is at 4.43%

Insider Trading (Neutral):
There has been no significant trades as of yet. Majority of the trades have been founders or directors cashing in on a rising share price. However I don’t see any significant buying or selling as the founders still have a significant stake in the company.

Management Team (Positive):
The management team is lead by the 2 founder Anthony Eisen and Nicholas Molnar, who have done an absolutely stellar job to this point. Not only have they done well in Australia, they have also managed to penetrate the US Market by picking up some major US brands.
What is interesting to note however, is the US equity incentive plan which they have established in the US to attract world class talent. This will give eligible employees the option to acquire common stock in Afterpay US Inc. (the Company’s US subsidiary). Although I agree providing employees with equity generally leads to a greater incentive of employees as they are directly remunerated according to the stock price, this does have the potential to dilute the share price. Furthermore the company does not want to disclose how many shares are on issue in Afterpay Inc.
Regardless, I have faith in upper management as they have a proven track record and the venture fund who suggested this incentive plan (Matrix Partners) is well established and experienced in the venture capital scene.


Macro Environment (Poor)
Looking at the overall general economy, there are a few signs that we are heading to recession territory. Many economists are pointing to the flattening yield curve as a key sign that the economy is heading to a recession.

As Afterpay lies in helping consumers spend more in retail, they are directly related to the level of disposable income and thus the total amount of retail sales. Within Australia there has been a general decline in retail, as highlighted by this recent ABC article ( https://www.abc.net.au/news/2019-03-07/retail-sales-and-trade-balance-january-2019/10878424).
Overall the general macro environment does not look good for Afterpay.

Conclusion: (Sell)
Overall my analysis of Afterpay gives me the conclusion of selling Afterpay at it’s current price as it is overvalued. Technically the stock is strong, but fundamentals and the macro environment are currently strong factors against holding the stock.
If I were to buy in I would recommend buying in at the 200 Moving Average support line of $16. This would be below my intrinsic value calculation + provide a strong level of support based off past chart performance.
Again please do not take this analysis as your investment decision, this is just my analysis on the stock and is for entertainment/ informative purposes only.

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