Why is APT soaring?

Chinese tech giant Tencent bought a 5% equity share of Afterpay (ASX:APT) ASX investors then rallied behind APT, triggering a 30% surge. Tencent was attracted to Afterpay after seeing its rapid expansion in the US, gaining 4.4 million customers in 2 years.

Before this news, many investors were sceptical about Afterpay surviving the COVID-19 crisis. Because investors were concerned about the BNPL business model (in fact, as of 27 April, there were 10.3 million short-sellers of APT stocks, representing 3.86% of Afterpay’s shares issued). One of its main issues was the possibility of the customers defaulting their payments, causing Afterpay’s bad debt to increase. The debt-default speculation is because many users of Afterpay are millennials. Millennials that earn less than $40,000, and are usually the first to be let go in a pandemic. APT’s share price went down to as low as $8.90 in late March (23 March 2020) and is now trading at $39.88 (8 May 2020).

How is Afterpay going to benefit?

One of the most significant benefits Afterpay can expect from Tencent is the expansion into the Asian market. Currently, the company focuses on the English-speaking market, and it has been successful so far. However, the opportunity in China looks enormous as McKinsey estimates the online retail market in China to be valued at $2.3 trillion. A valuation which is 2.5 times bigger than the size of the US market. Further, the millennial demographic makes up around 30% of China’s population, offering further opportunities for Afterpay.

Tencent may also be a potential funding source for Afterpay, providing capital for global expansion of the business. Providing confidence for shareholders despite concerns on credit losses and falling consumer sentiment.

How has Afterpay performed during the pandemic, and what are the expectations?

According to its 2020 1st quarter sales result, Afterpay outperformed analyst expectations. In the first quarter, Afterpay reported underlying sales of $2.6 billion, up 97% as compared to the same period in 2019. They were also able to gain more customers, currently at 8.4 million, up from 4.6 million in 2019 1stquarter. Despite the credit concerns, Afterpay had enough cash and liquidity in their accounts and have no plans to raise capital anytime soon.

For Afterpay, the Australia and New Zealand market seems crucial until further slowdown of the outbreak in the US and UK. In the first quarter, sales declined sharper than expected in the US and the UK market. Mainly because of a lack of diversification of merchants. The ANZ market is more diversified, including retailers selling essential goods, who remains open for the business. Further, COVID-19 seems to be slowing down in Australia and New Zealand, causing restrictions to ease and help many retailers to re-open. Ultimately, allowing Afterpay’s revenue to pick back up temporarily.

 

Afterpay a growing bubble within a tech bubble

APT’s share growth should alarm current investors. After rising 400 +% it seems everyone is buying their tickets for the Afterpay train. However, why is everyone boarding? Maybe momentum, the Tencent announcement, or Institutional recommendations.

APT is taking off with concerning speculation. Most investors do not sell straight away because they want to make more money (greed.) Hence, the astronomical 400% rise. If APT continues to rise, the stock will enter a state of uncontrollable euphoria.

It seems like a lot of sheep are soon to be slaughtered. Now yes, APT should rise in the coming weeks as the re-opening of the economy fuels a bullish run. However, the fear of a wave second could send APT spiraling down again. Also, the world economy is damaged. Meaning, even if Australia flattens the curve for good APT still relies on overseas, customers. Considering they saturated Australia. Lastly, the BNPL industry should be put in a legal cage in the coming years. A legal restructure, in regards to lending to people with poor credit, would see APT fall. Once the fear is re-injected into the market, short sellers will flock to APT. Shorter sellers make retail investors panic and sell. Ultimately causing the APT bubble to pop.

Thus, APT is a growing bubble. When will the bubble burst is anyone’s guess?

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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 Jaewon Jung, Associate of YIG.

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