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Excellent post StefanF.Some further thoughts from me:1) While...

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Trevor2017

1,032 Posts.

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28/01/20

02:57

Post #: 42592634
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Originally posted by StefanF: ↑

Hi guys,

This thread is for people to give a detailed view on why Afterpay is a Buy/Hold/Sell. Detail and balance is appreciated and I'd love to hear from some one who has dealt with Afterpay as a merchant. Here is my take:

Here is my take on why Afterpay still is a BUY:

Win-Win
Starting with the most obvious reason, the win-win. Afterpay has clear positive implications on both Merchants and Consumers. The merchants get the benefit of substantial increases in basket sizes and conversion rates. The Consumer gets the tool to shop multiple items now and pay over a few weeks, eliminating the need to do one shop every few weeks if money is tight. This leads well into:

Marketing
The secret sauce of the BNPL sector is the fact that both Consumers and Merchants feel like they are getting a benefit. This leads to merchants seeking out Afterpay as a service without Afterpay needing to market to them. In addition, the power of social media allows for consumers to reach out to their favourite merchants and requesting BNPL options. This is the single biggest reason why Afterpay absolutely shot up to a $10 billion company in a number of years (and is also the single biggest reason why this trend will continue).

The generational shift
The way shopping is done has changed in unprecedented ways, moving from brick and mortar stores to online shopping. I'm a good example of a person who almost exclusively shops online due to the range accessible at the comfort of the couch (I consider myself very time-poor). This in itself is a big positive for Afterpay which has created a market place but in general is very user-friendly to those shopping online.

One of the big problems that online shopping has created is the uncertainty around sizing. Consumers are often forced to buy the same item in multiple sizes (think girls shopping for a dress for an upcoming occasion) and not everyone has money to purchase the same item multiple times. Afterpay completely eliminates this issue as consumers can purchase these items and return the ones they don't need before getting charged. The solution to this problem should not be underestimated.

Millenials and credit
In previous generations as a consumer little was known about credit, interest and its true cost. The magic of the internet has changed all this. It's become easier to compare services, get reviews and opinions that point out bad products and with all kinds of loan calculators online the true cost of credit has become a lot more transparent. This has created a shift away from credit cards and BNPL is poised to take advantage as this shift continues.

The Tech
Banks use credit application models (step 1) to figure out how much a person can borrow and essentially offer them the maximum they are comfortable with. Their behavioural credit risk models (step 2) kick in after 6-12 months and the limit increases if necessary. This two-step process is necessary due to the amount that banks lend to consumers.

Afterpay skips step 1 and instead provide a limit to any participating customer. While this carries some risk, the fact that the limit is so low per customer limits this risk to Afterpay. This means Afterpay didn't need to develop application scorecard models, instead focusing on behavioural models. Almost identical to the banks, these behavioural models collect data over 6-12 months and increase limits where credit risk appears low.

The Tech is essentially the same as banks but used very differently, somewhat revolutionary by allowing BNPL companies to reach a massive amount of customers quickly. Also worth noting that once these behavioural models are set up they only require periodical recalibration which isn't massive labour intensive.

Competition
If you are a merchant you don't care if you sell your product to a customer via Afterpay and pay 5% in fees or through Z1P and pay 5% in fees. This means that we will likely see more and more merchants adopt multiple BNPL platforms which is great news for Afterpay because having the highest amount of users (in Australia and perhaps US) means there is no reason why a merchant shouldn't offer Afterpay, even if they are only offering a competitor for the time being. I stress this as an important point, and is one of the reasons why I would still buy Afterpay over cheaper comeptitors who would have much more of a harder time in gaining merchants and gaining any market share.

The Potential
If BNPL isn't just a fad, but rather a once-in-a-generation consumer behaviour shift then Afterpay, as the market leader has insane potential. My personal opinion (judged entirely on what has happened in Australia over the last two/three years) is that this is a consumer behaviour shift towards BNPL which is why I also hold Z1P and FXL although even at APT's market cap I still see the largest potential.

Threats
There are a couple of considerations that could affect Afterpays revenue. In this low interest rate environment Afterpay is getting access to cheap funding, and as interest rates increase in the future this will put pressure on profit margins. In addition, any material increase in bad debt charges (defaults) will also impact profitability. Afterpay has a good track record of keeping bad debt charges low by cutting any offenders off early. I also believe the low bad debt charges are a real credit to the behavioural credit models that Afterpay has created. Lastly there is regulatory risk, although in my personal opinion this risk is overhyped. I work in banking and if regulators are happy with high percentage credit cards as payday lending then they should be opening BNPL with open arms.

There are some topics that I don't have enough knowledge and would love for someone more knowledgable to cover:
1. Big data
2. Marketplace
3. Anything else I've missed.

I'd love to hear the story from a merchants perspective.

Expand

Excellent post StefanF.

Some further thoughts from me:

1) While it's true that a credit app score model is by-passed, however I don't know that APT is currently offering different limit to customers based on their risk profiles via a behavioural score model (is it really true?)...As I've mentioned in a post a while back, I believe APT will at later stage offer more customised products based on customers' personal attributes and I see that the on-boarding of the tech hedge fund recently is a sign that the company is heading into this direction. I believe that the products will eventually cater for the life cycle of a customer instead of focusing purely on the early stage of one's earning life.

2) I believe APT is not just a typical payment option but can become a retail market platform. People (i) check out retail outlet advertised through FB and Instagram and (ii) if they are interested, head to the retail website and (iii) if decided, pay via the preferred payment option. Literally this process consists of 3 steps. The interesting thing is that APT is showing sign that these steps can be merged into one: people headed to APT to do shopping, comparing and paying in one go while the advertising and budgeting are tailored as point 1) noted above. Taking market share from FB and Instagram alike is what I see a truly mouth-watering opportunity.

I've no plan to sell and take profit from APT even on a long term basis...

Last edited by Trevor2017: 28/01/20

APT Price at posting: $37.00 Sentiment: Buy Disclosure: Held
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