Afterpay Valuation

The appropriate valuation for Afterpay is such an incredibly hotly debated topic (both on HC and in the wider financial press) that I thought it warranted its own discussion thread.

Currently there are a number of brokers that are covering the stock, with 12 month Price Targets ranging from $17 from our friends at UBS to $44 from Johnny come lately Morgan Stanley. That puts MS at more than 150% above UBS which is pretty amazing in of itself.

I have been working on a quick and dirty way of trying to sense check the valuation of the company against the underlying metrics which it is producing with the key metric that I have identified being GMV. Whilst you could also use customer numbers, this ignores the fact that annual spend per customer is showing a steady rate of increase, which is captured in GMV. Of course, if there is a significant change in NTM this will affect valuation independent of GMV, so I am working on the assumption that NTM is constant.

The table below shows that there is an established relationship between Afterpay's GMV (measured on a Last Twelve Months basis) and its market capitalisation (I originally used share price, but realised I needed to take any share issues into account).



My research has shown that the market cap of APT has been approximately 1.1x its LTM GMV for a period of more than 2 years. It's interesting that as of 30 Sept 19, APT's share price of ~$36 had broken well above its "theoretical" value of ~$28, but the correction we have seen since has pretty much restored parity. The final 3 data points on the graph represent my forecasts for LTM GMV and what the corresponding market cap would be based on the historical ratio. This puts the SP at ~$33.50 at the end of this year and ~$47 at 30 June 2020 (not significantly different to the MS PT).

Another thing this really reinforces is that while the share price might run away from the theoretical value at times, when you have such strong growth in the underlying metrics, it doesn't take long for these to catch up. It is worth noting that if you assume the company's GMV in FY22 is $25b (the company has a target of $20b++), the theoretical SP is ~$110 (assuming no share issues between now and then (admittedly unlikely)).

I would caveat all of this with my view that the 1.1x relationship will probably reduce slowly over time as the overall business matures, but given the potential growth runway ahead, this may still be a few years away.

Obviously all IMO and please DYOR.

Let the debate rage on......