- COVID Pandemic has bolstered the business growth prospects of Afterpay significantly backed by customers’ liquidity crunch amid pandemic and preference for digital transactions
- APT reported strong year till date sales in mid-April with strong cash position to implement growth plans
- However, with persisting economic uncertainty coupled with APT’s risky business model of providing interest-free credit to customers exposes the company possibility of a mounting bad debt
The growth of the Buy now Pay later (BNPL) market had been astounding during the pandemic driven economy. While most of the sectors are struggling to survive, the business prospects of the BNPL players have grown manifold.
The role played by the BNPL players in supporting the economy is also extremely commendable. While social distancing, staying at home and adhering to basic lifestyle have taken a dig on various luxurious and non-essential purchases, provision of contactless payment and the convenience of paying in instalments has given procuring power to many customers who otherwise would not have made various acquisitions during the downtrodden economy. The purchasing power gained through BNPL credit has boosted consumption across economies, rest alone Australia.
One of the prominent players in the BNPL market, Afterpay Limited (ASX:APT), has been instrumental in bolstering the industry growth. The company itself has achieved new heights in its business amid the liquidity-crunched economy.
The share price of the company was last traded at AU$56.92 on 25 June 2020, more than 90% higher on year-till date level and approx. 540% than the March low of AU$8.90 on 23 March 2020. The price rally was backed by strong business performance, geographic expansion and increasing customer base.
However, with economy uncertainties still looming, can Afterpay continue its positive stance on the stock exchange?
The company has been demonstrating strong business performance with a good cash position and increased revenues. In January, the company closed a share purchase plan, in which the company offered shares at a price AU$ 15.00 to its Australian and New Zealand based shareholder without charging any fees. The company shares ended at AU$34.82 on the stock exchange on the day of announcement, 44% higher than the offer price of AU$15.00.
Strong Revenue growth in H1 2020 and Q3 FY2020
The company’s underlying sales experienced a 109% boost to reach AU$4.8 billion in its H1 FY2020. The boost in revenues was because of strong sales recorded in its US, Australia, and New Zealand business. Q3 FY2020 witnessed revenues to reach AU$7.3 billion year till date along with company highlighting a strong cash position backed by debt facilities. APT’s share price recorded an increase of 29.09% and closed at AU$28.40 after announcement of results.
Customer base also increased considerably with the company serving almost 7.3 million customers worldwide by H1 2020 and in May, announced to serve around 5 million customers in the US itself.
Addition of Chinese fintech giant on board and MSCI Australia Index addition
In May, Hongkong Exchange listed Tencent Holding joined the company board with a 5% shareholding. The addition of Tencent boosted shareholder confidence considerably as the Tencent is a leading China based internet related service provider and offers Weixin, WeChat, and QQ communication platforms with the Weixin pay service deemed as a leading mobile payment service provider in China.
Addition to the MSCI Australia Index on 29 May 2020 also demonstrated the strength and indicates fund managers adding up the stock in their portfolio to meet the benchmark and market confidence on the company’s growth prospects.
What may go wrong?
Afterpay’s business model has a risky tone as the company provides credit to its customers without charging any interest. The customers pay back the money to Afterpay in four instalments. The company operates by tying up with merchants in lieu of a nominal fee from them. Being on the Afterpay platform allows merchants to receive full payment at the time of transaction. The entire payment cycle gets completed when the customer fully pays back the transaction amount to Afterpay.
Afterpay boasts of strong cash position. However, this strong cash position is backed by access to considerable debt facilities. And debt facilities come with a cost as it falls under liability and the company is liable to payback the debt with interest.
Increasing number of customers also indicates exposure to risk as new customers may not payback debt on time or at all, leading to a possibility of rising bad debt or increased account receivables. The company have to make sure that account receivables is minimum as they represent the credit given to customers. Keeping account receivables under check leads to investment in operations necessary to collect debt from customers.
Is the future gloomy or promising?
With economy turmoil continues to plague businesses worldwide including the US, Australia and New Zealand, representing company’s core geographical areas of operation, there is a high possibility of continued increase in unemployment rate and financial insecurity among customers, leading to defaults.
Continued economic downturn and arrival of the anticipated second wave of coronavirus may lead to further business growth because of increased customer base and merchants onboard. However, this may also lead to increased exposure to risk and business loss with mounting amount of debt on its Balance Sheet.
Given the optimistic outlook of the Australian economy and reopening of world economies, market seems to discount a promising future outcome. On that note, investors are keenly keeping a watch on APT’s long-term performance which will be dependent on the financial security of its consumer, employment rate, economic performance, and arrival of the anticipated second wave of infection.