Afterpay Valuation, page-1893

With the SP of AfterPay having run up to unthought of levels in recent weeks, the subject of valuation and whether it is currently overvalued has once again become a highly debated topic. As I discussed in my first post on this thread, the market capitalisation of Afterpay (on an undiluted basis) has tracked at roughly 1.13x its LTM GMV for an extended period of time. At the height of the COVID panic, the market cap fell to only 21% of this theoretical valuation, while on Friday when it touched $70 per share it was 157% of its theoretical value. This then raises the question of whether since mid March there have been any significant factors which may have altered this relationship. IMO the following are worth mentioning.

Positive Factors

1. Tencent taking a 5% stake in Afterpay - apart from being a huge validation of Afterpay as a company, this opens up a number of scenarios around co-operation between the 2 companies which could be of enormous benefit to Afterpay.
2. Afterpay being included in the MSCI Australia Index - this brings a whole new group of investors on to the Afterpay share register and significantly raises the profile of the company from an international investor perspective. In addition, it locks away a meaningful number of shares which coupled with the Tencent buying means the share register has tightened considerably. This tends to create a virtuous cycle where an appreciating share price attracts more investors who are chasing a smaller and smaller number of "available" shares.
3. COVID has led to a seismic shift in the way people shop (from in-store to on-line) - whilst this was partially to do with bricks and mortar stores being shuttered, it seems to be generally accepted that a reasonable part of this shift will not revert back even with physical stores re-opening. With the vast majority of Afterpay's GMV generated through the on-line channel this has very significant benefits for Afterpay in both the short and medium term.

Negative Factors

1. The COVID induced downturn will significantly reduce discretionary spending - it is being speculated that the economy is currently being supported by the short term sugar hit of government hand-outs and that when these programs end, retail spending (particularly discretionary) will meaningfully reduce which would also impact Afterpay's GMV growth rates.
2. The COVID induced downturn will lead to higher customer default rates - as per above, it is speculated that a wave of defaults will occur once government support to the economy is withdrawn. This could result in the company having to raise additional capital to offset balance sheet impairment.

IMO, the sum total of the above is positive for Afterpay's valuation, particularly over the medium term (1-2 years) and may go some way to justifying the recent SP appreciation.

If however you assume that the 1.13x relationship re-asserts itself and that FY21 GMV is ~$18b then you arrive at a current SP of ~$45 and a 12 month Price Target of ~$75.

Then of course there are the long term bears who feel it isn't even worth $20.

All makes for a very animated debate.