A case for APT, page-3

Very good article. Here are some key points summarised that I think aren't well understood by many holders but more importantly downrampers:

Downrampers: "Afterpay needs to continue raising capital to make their business work"
Article: "The core driver of the Afterpay model is its extreme capital efficiency and the uniqueness of its model to capture value."

My take: Afterpay raises capital to take advantage of the current spike in usage to continue aggressively expanding into new markets. They are not raising capital to fund new customer usage, they use funding warehouse facilities for that. Understanding the difference between capital (cash etc used for operating expenses, marketing etc) and funding warehouse facilities that are like a massive revolving loan with a large financial institution is absolutely key in understanding this business.

Article: Conversely, Afterpay has historically turned over its loan book approximately eight times a year whilst collecting a fixed return per cycle. This allows the company to squeeze a much higher return out of a much smaller capital base.

My take: This refers to the warehouse funding facility. Afterpay pays a fixed annual % fee on amount that Afterpay uses, while Afterpay received a % from each customer multiple times a year. This is what the article meant with capital efficiency.

Downrampers: How can merchants possibly afford 4%?
Article: The company enjoys strong and scalable unit economics driven by a high level of automation. Its initial core target markets were skewed towards discretionary consumer markets, which typically have high gross margins thereby making Afterpay's merchant fees supportable.

My take: Discretionary items are high margins, with much of the margin being eroded by the need to advertise. Afterpay acts as a marketing medium as well as a payment method so that should be considered. Just to give some perspective, my mate worked for a clothing company that bought $1 shirts from China and sold them for $99.
In addition, merchants gain further benefit as explained by the article:

Article: Merchants are attracted by increased customer spending via larger basket sizes as well as higher repeat purchase rates. In addition, the use of Afterpay draws new customers to merchants as well as reducing the financial risk of charge-backs and fraudulent payments as Afterpay bears the financial risk post transaction.

Downrampers: "Watch out for an increase in bad debt"
Article on Risk Management: This stricter adherence approach has been hugely beneficial to the company for a variety of reasons. By weeding out bad players continually in real-time, Afterpay increases the quality and therefore value of the existing user base. A harsher compliance regime also ensures that bad players bear a real opportunity cost, as being banned means paying for competing services versus Afterpay's free service. This opportunity cost also ensures that the user base is sticky and compliant. Over time this leads to superior outcomes in terms of risk and shareholder value.

My take: As a Risk Analyst I've always been very vocal on how good Afterpay's risk management is. The simplicity of it's product is one of the key benefits over competitors like Z1P. I've explained Afterpay's default situation months ago:
https://hotcopper.com.au/threads/objective-analysis-bnpl-bad-debt-explained.5388454/#.XytdzZ4zaUk
And also why them doing credit checks, compared to competitors is a non-issue:
https://hotcopper.com.au/threads/ob...cks-vs-no-credit-checks.5486835/#.Xytd-p4zaUk

Article: "Securing its first-mover advantage involved Afterpay capturing as much of this demographic as possible, as quickly as feasible in a straight out 'land-grab' scenario. "
My take: This is sooooo important and something many BNPL investors don't understand. There seems to be this idea by some that the Afterpay ship has sailed and that if you want multibaggers you need to invest in Z1P and SZL (I hold smaller positions in both). But this is far from the truth. Having first mover advantage in a new and fast growing sector is a huge advantage, especially in a sector where gaining merchant and customer acceptance WORLDWIDE is everything. It really is a land grab at the moment.

All in my opinion of course. Thanks OP for sharing this article, it touches on most of the points that are the reason for this being the biggest investment in my portfolio.