After reading this on Nabtrade I thought it best to take some profit. Afterpay Touch Group (APT) The financial technology (fintech) company has rocketed from $3 in early 2017 to $8.47. Afterpay’s lay-by concept, where products are paid for in four instalments, has caught on with young consumers and retailers eager to reach them. Afterpay has a valuable first-mover advantage in retail and terrific potential to expand in the US, having signed up the giant Urban Outfitters there as a partner in the concept. The company will be several times larger if it replicates its Australian success in the US and early signs are encouraging. However, I have four main concerns, given Afterpay’s valuation. First, the market is already factoring in strong growth in the US and any disappointment could crunch the share price. Goldman Sachs this year reportedly attributed $1.50 of its $6.30 price target for Afterpay to the US operations. The market believes the US business is worth a lot more at Afterpay’s current price. Second, Afterpay’s form of lending (lay-by) is hardly new or unique. That’s not to downplay Afterpay’s innovation in finding a form of lay-by that appeals to the psyche of young consumers, or its first-mover advantage as it quickly signs up more retailers to the service. Having a larger network of retailers using the service can be a “barrier to entry” in itself. But Afterpay’s moat (its competitive advantage) is not as defendable as other tech companies with sky-high valuations. I’ve noticed rival lenders increasing their presence in this market, and Afterpay’s success will surely attract extra attention in the US. Third, some good judges I know are concerned by Afterpay’s bad-debt provisions. They think it’s too low given this form of lending and Afterpay’s target market of younger consumers (who don’t always pay their debts). I’m not as concerned, but it’s something to watch, if levels of bad debt climb. Fourth, Afterpay founders sold some shares recently, a move that did not seem to concern the market. Regulatory risk is another issue, if greater disclosure is required in late fees and other compliance issues. The market might be underplaying this risk at Afterpay’s valuation. In fairness, Afterpay is one of the best floats in years and deserves its status as a fintech poster company. But a forward PE multiple of more than 70 times, based on consensus estimates, is high even by tech standards. The valuation, based on earnings-per-share growth of about 100%, leaves no room for error and makes Afterpay susceptible to heavy price falls. As with others on this list, early investors in Afterpay could take some profits and maintain a smaller holding to share in any further upside. Should a correction occur, they will have cash to buy back in at lower prices in a stock that has excellent long-term prospects but has run too far and fast for now as the market embraces fintech.
https://www.nabtrade.com.au/investor/insights/latest-news/news/2018/06/3_stocks_to_takepro
