Before I start, I am obliged to remind our viewers that this is not advice only general commentary from my extensive research in this area.
The Afterpay story of success dates back to April 2018 when the stock skyrocketed to $19.69 by August 2018 from a mere $5.45 a few months earlier. The BNPL industry has found recent success due to its ability to attract the younger demographic, offering a “interest free” method of credit that allows them to purchase goods and pay for them later in split payments. The easiest way to understand how APT makes money is that they do not charge the customer for lending, BNPL companies will charge the merchant a fee and will only ever make money off the client if they cannot make payments in time.
Why is AfterPay expected to grow through 2020?
AfterPay is seeing a fast growth rate of clients in 2019 as they begin to grow in popularity in the United States and United Kingdom. There is no argument that the BNPL industry has seen major success this year alone, with rivals ZIP co posting a very strong EOY report as well as strong predictions that clientel would double in the coming year. AfterPay , being the giant of the BNPL industry will only benefit from the increasing number of Australian’s using this revoluntionary system of credit. It’s important to understand that the growth in 2019 is due to the promising management and growth shown in the FY report 2019 which surprised even the most skeptical investors . The biggest opportunity for AfterPay in 2020 is that the stock price is targeted at $42 by top Australian brokers , furthermore Morgan Stanley is set the target to $44 in 2020. These predictions show a bullish trend towards a positive year for BNPL companies but maybe an even bigger year for the giant AfterPay themselves.
So what’s the catch ?
The BNPL is a booming industry , however as discussed in my article on ZIP co a major competitor to AfterPay , the Beta and EPS ratios are a concern for investors. AfterPay has one of the highest Beta’s in the industry at 2.08 and a negative EPS show a concern for it’s collatoralised debt that AfterPay is accepting at a very fast pace . However , you must understand these companies will run a negative EPS for a few years as their earnings will need to catch up to their high share price. The Beta however will be a concern if the economy goes into a crisis, as the Beta is a measure of the percent change of the firm per 1% change in the market portfolio . Therefore , if the market portfolio crashes by -15% due to a recession , theoretically AfterPay will fall over double at -30% . This is the risk investors will take , as a higher risk will equal a higher reward (if the market booms by 15% then Afterpay will rise 30% ) .
When’s the best time to buy?
APT is currently sitting at $32.91 at the time of writing, which saw an increase of 4.24% at market close. This is due to the positive news released about the future target prices for APT aswell as it’s market recovery due to UBS brokers putting a SELL label on the stock just under 4 weeks ago. It’s hard to estimate the next weeks market movements , therefore harder to find a good time to enter. However , it’s current price if seen as a short term investment is quite overvalued as a result of YIG research. If the stock takes another hit due to market confidence, it would create the perfect entering opportnuity however individual research is advised. With the BNPL industry , it is so imoportant that you understand the basic theories surrounding risk (BETA) aswell as other indicators that will ensure you do not lose money on your investment.
To conclude , there is absolutely no doubt in my mind that AfterPay will increase in value as the industry and competitors around them grow. A price of $44 may seem a very steep evaluation target , however AfterPay has proven to investors time and time again that it should never be underestimated.
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Tyger Fitzpatrick, founder of YIG.