Great post. Couldn't agree more with below statement.
If you buy at any price, and you don't have a good idea of why you are buying at the price you are, you will end up selling at an inopportune time when doubts surface or the share price drops. The real money is made by getting something right, and holding on for a long long time.
The SP of $16.5 might seem expensive now after a very quick rise over the past 6 months. However, if you have a well-thought-out view on the potential future earnings under different growth scenarios, this will provide guidance on whether significant SP appreciation from this point onwards is a strong possibility - in turn informing your investments decisions instead of going on gut feel.
I therefore decided to put together a new model to assess if the SP projections by Bell Potter ($21 in 12 months) and posters ($25-50) could eventuate. Like any model, it's based on a range of assumptions on which I note the following:
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Transaction value growth: Australia is still growing fast (289% in FY18 with strong Q4) and with the U.S. launch we should be able to at least double underlying sales in FY19. As the U.S. is still only ramping up in FY19, I would expect another growth rate close to 100% in FY20 after which growth rates will probably decline even if expanding to other (smaller) markets. The $ growth keeps increasing though (larger base).
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Merchant fee: static at 4% (there could be upside here)
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Net transaction loss: moves towards upper range of company guidance with sales increasingly from more immature markets.
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D&A: static as per Bell Potter's report
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Other margins: % static
The underlying assumptions can be debated and it would be great to get thoughts & feedback from other posters.
Moving on, I was mainly interested in projecting the future SP based on Price Earnings Growth (PEG) ratio, which is a lot more relevant than PE for a high-growth company like APT. With a PEG ratio of 1, the model shows that a $20 share price next year and $30 in a few years time is very much achievable. Increasing PEG to 1.2 shows SP of $25 next yr and $40 by FY22. Further upside is possible if average merchant fee goes up and cost margins improve.
In the end, it will mainly come down to the top-line growth and the future TTV investors believe APT can achieve. It's quite straightforward to take below model, assume NPAT at 0.8% of TTV and do some scenario modeling with different TTV projections.
Final note. The model also shows that PE will remain high as long as the strong growth is maintained and it's probably not suitable metric to use in the next 5-10 yrs for Afterpay.
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