Market Darling Afterpay at $67, More Steam left?

  • Jul 03, 2020 AEST
  • Team Kalkine
Market Darling Afterpay at $67, More Steam left?

Summary

  • The pandemic has boosted the prospects of Afterpay significantly with increased number of customers onboarding from its key operating areas – Australia, NZ, the US, and the UK.
  • Preference for digital transactions, liquidity crunch and the ability to buy a merchandise on instalments acted as catalyst in the business growth of APT.
  • However, resurgence of COVID-19 cases may tarnish the business prospects in long run with heightened exposure to rising bad debt because of customers inability to pay back to Afterpay.

The journey of Afterpay has been astounding during the pandemic driven economy.  On 2 July 2020, the Buy now pay later (BNPL) heartthrob Afterpay Limited (ASX:APT) closed at $68.16, an all-time high, up by 9.512% from its previous close.

Also, on 3 July 2020, APT ended the trading session at $67.500, marginally down by 0.968% compared to its last close.

The question is, would Afterpay keep continuing its performance?

The Pandemic driven opportunity

COVID-19 has given a beyond belief opportunity to BNPL players. The BNPL market has been one of the most outperforming sectors during the pandemic when most of the sectors have been striving hard to sustain themselves.

With social distancing in place and consumption level declining because of liquidity crunch and unemployment, the BNPL players had been instrumental in supporting the economy by providing purchasing power to buyers and the relaxation of paying the entire amount in one go.

ALSO READ: BNPL Stocks Benefitting from the Boost in Contactless Payments

The growing UK Business

Afterpay experienced a 238.26% jump in its share price in the last three months. The price rally was backed by strong business performance across the US and the UK. Geographic expansion and increasing customer base bolstered its business performance significantly.

On 23 Jun 2020, the Company announced positive business performance from its UK business with more than one million active shoppers using the Clearpay service of Afterpay’s. Clearpay is part of the global instalments’ payment solution offered by Afterpay.

As per the Company’s announcement, the UK business is faring better with respect to the US business when compared to same stage of product lifecycle. Customers are transacting 8 times more in the UK within first year of product introduction, as compared to the US where customers were transacting 6 times within first year of introduction.

In the UK, Clearpay is in the process of being adopted by more than 1,100 brands and retailers. Clearpay boasts of a strong pipeline with leading merchants set to offer the payment platform. Recent merchants who came onboard are Elemis, Bare Minerals, ISAWITFIRST, Apricot, Size, Koibird and Sana Jardin. Existing portfolio of brands include ASOS, M&S, JD Sports, Urban Outfitters, Boohoo, and Look Fantastic, among others.

The UK business surged during COVID-19 period with its high adoption rate among customers. In May 2020, Clearpay recorded more than 3 million app and site visits with the Shop Directory demonstrating over 1.5 million lead referrals to its retail partners, representing a 40-50% rise in the weekly run rate from January and February.

As per the announcement, merchants using Clearpay experience over 20% increase in customer conversion rates and 25% increase in average order values when compared to all other payment methods.

Afterpay presently operates in Australia, New Zealand, and the United States. In the United Kingdom, the business is called Clearpay.

Strong fund position, Revenue growth in H1 2020 and Q3 FY2020, and increased customers

H1 FY2020 period ended 31 December 2019 recorded 109% boost in the Company’s underlying sales, hitting $4.8 billion. The increased revenues were backed by strong sales recorded from the US, Australia, and New Zealand Business.  Revenues reached $7.3 billion on year till date basis in Q3 FY2020 (as announced on 14 April), with balance sheet demonstrating a strong cash position backed by debt facilities.

By H1 2020, 7.3 million customers were being served by Afterpay globally with 5 million being served in the US itself, as per the Company’s announcement in May.

Do Read: Can Afterpay’s share price touch A$75 Mark? Lens on BNPL Players

Addition of Chinese fintech giant on board and MSCI Australia Index addition

Tencent Holding securing a 5% interest in the Company has also added goodwill to the Company, boosting shareholder confidence. Tencent is a leading China based internet related service provider and offers communication platforms such as Weixin, WeChat, and QQ. The Weixin pay service is considered as a leading mobile payment service provider in China.

APT’s addition to MSCI Australia Index in May 2020 also indicates that fund managers would be adding up the stock in their portfolio to meet the benchmark, boosting investor confidence further.

Will the shares climb high?

Source: ASX

Source: ASX

Afterpay operates by facilitating customer payment to merchants by charging a small fee from the merchant at the time of purchase, allowing customers to payback the purchased amount in four instalments without any interest if paid on time. For late payment from customers, the Company charges late fees.

The business model is deemed risky as there is a question in the integrity of customers paying back the credit, leading to bad debts and increased account receivables.  With increasing number of customers, the exposure to risk of bad debts and increased account receivables gets heightened.

Investments on tools and processes to keep bad debt from increasing also increase costs of the Company.

With economy continuing to remain uncertain with resurgence of cases in Australia, there is a high possibility of continued unemployment and increased liquidity crunch among customers, leading to defaults.  

If the business falters in the future, APT would be liable to pay back the debt, it is banking upon to foster growth of the Company. The debt payback also includes interest.

However, both Australian economy and the world economy are riding on positivity with reopening of businesses and relaxed restriction on social distancing. On that note, APT has fare chances to leverage on the growing economy.

Disclaimer: All the currencies mentioned are in AUD unless specified

 


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