Fintech Darling Afterpay Loosing Charm?

Summary

• COVID has significantly added to business growth prospects of Fintech star Afterpay, with transitioning customers’ preference towards contactless and digital transactions.
• APT reported strong Q3FY2020 results with strong cash position to execute its expansion plans across key markets.
• However, APT operates on a risky business model by providing credit to customers at zero interest. Besides, increasing number of customers/merchants exposes the company to a risk of bad debt.
• With mounting economic uncertaintity, fintech darling Afterpay and its price rally continues to be in spotlight.

Buy now pay later industry has been one of the best performers amid coronavirus pandemic. While virus spread created havoc around economies and businesses, it has no doubt added to the business growth of BNPL players, driven by customers’ shift towards contactless, digital transactions and services.

With COVID-19 lockdown restrictions and social distancing norms becoming a new normal, BNPL players have managed to eat a major portion of the pie, with people increasingly relying on fintech services to spread their financial burden.

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

Afterpay Limited (ASX: APT) had been a pioneer of the market ever since pandemic hit the world. With share pricing trading 91.61% higher on year-till date basis, the company has been setting example on how to multiply business across geographies, with series of positive announcements and boosting shareholder confidence.

With such glories on back, Afterpay opened at AU$57.71 on 22 June 2020, almost 500% up since its March low of AU$ 8.90 on 23 March 2020.

However, is the company fundamentally in a strong position to continue its growth journey?

While the company continues to build its customers and merchant relationships, Afterpay’s business expansion and stock growth story deserve closer attention amidst mounting economic turmoil and accelerated worries over second wave of infection.

APT Under Spotlight with Key Geographical Growth

In January 2020, Afterpay completed a share purchase plan in which it offered A$15k of new fully paid ordinary shares to eligible shareholders from ANZ without any brokerage or fees. Notably, shares closed at A$34.82, 44% higher than the offer price on the day of announcement.   

Afterpay’s underlying sales recorded a 109% increase in 1H FY2020 to hit A$4.8 billion, backed by strong business growth from its geographic markets – the US, Australia and New Zealand. Revenues grew further to reach A$7.3 billion by mid-April ,along with the company reporting strong cash position.

While the company reported serving 7.3 million customers during first half of financial year, it catered to almost 5 million customers in the US in May.

Its Q3FY2020 results were also impressive with A$7.3 billion sales year till date with a strong cash position. APT’s share price recorded an increase of 29.09% to close at A$28.4 following the announcement of results.

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

Growth Story Continues

Moreover, Tencent joining the company as a 5% stakeholder also boosted business prospects of the company. Hongkong Exchange listed Tencent is a China based leading internet related service provider with Weixin, WeChat, and QQ communication platforms. The Weixin pay service has already marked a strong presence in China as a leading mobile payment service provider.

Afterpay also got added to the MSCI Australia Index on 29 May 2020. Addition to MSCI index means fund managers will have to buy the stock in their portfolio to meet the benchmark. This further enhances investors’ confidence in the BNPL player.

Look at Flip Side of Growth Story

Afterpay apparently operates on a risky business model. The company provides credit to its customers without charging an iota of interest, to be paid back in four instalments. While merchants receive full payment at the time of transaction, they have to pay a small fee to Afterpay. The entire payment cycle gets completed when the customer pays back the transaction amount to Afterpay in four instalments.

Afterpay’s cash position remains strong with access to considerable debt facilities. The company is banking upon this liquidity to boost its business growth; however, the company is also liable to payback the debt and to ensure that its account receivables should be under check. This calls for substantial investment and maintenance in tools/processes to monitor collection of customer debt.

While business expansion and increased onboarding of customers appear to be all honky-dory, increasing number of customers also exposes the company to clients who may not have the needed integrity to payback debt on time or at all, leading to mounting possibility of bad debt.

While the pandemic has been engulfing economies worldwide and specially its core business operating geographies, namely the US, Australia and New Zealand, rising unemployment and financial insecurity of customers remain uncertain and may affect the business with increasing defaults.

As second wave of coronavirus pandemic is anticipated, there is high probability that the company’s customer base may experience further uptick, while associated higher default risks call for further proactiveness and strategic initiatives by Afterpay.

While RBI is pondering over the sharp rally in share prices since March low with APT being no exception, Afterpay’s growth trajectory will depend on lot of factors like consumer confidence, revival to economic growth of key market, labour market scenario and severity of anticipated second wave of infection.

APT last traded at A$ 57.94 on 22 June 2020 , down by 1.28% from its previous close.