Coppo Report today re APT Afterpay{7.82 0.42 5.68%} BUY .. up +40% since AFR article !!! (and best performing Small Ords stock in May)
Stock has been my Number 1 pick for 2018 & despite the selloff a few months back I have not (nor will) waiver.
In fact since the AFR article attacking my strong support for Afterpay came out on the 10th April - that to me (and others) looked like the last desperate attempt by the shorts / bears to get the stock price down - seems to have officially failed - the stock has nowrallied +$2.21 or 43% from $5.47 on the day it came out.
Personally, I had (which many find unusual) no problem with the article - yes its wasn't accurate in parts (ie I have no benefit in any way from Bells doing the founders placement), but parts of it were very amusing.
Stock bounced back strongly today following a -5% drop yesterday - but that (one day) selloff came on the back of a sensational run where it had rallied +11% in the previous 6 days straight (from $7.04)
It will I suspect make another attempt in the next few week on its previous record high of $8.16 - but (I suspect) the shorts will do their best for that not to happen..
The last time it was up here it got hammered very hard from these levels as the shorts went very hard from 6.38% at the time when stock was trading at $8.00 on the 12th May & sold it hard to $5.40 as the shorts increased to a record 9.8%on the 8th May.
Since then the shorts have been burned badly as the price has gone all the way back up again.
But I'd guess that anytime it gets near $7.80 / $8.00 there will be some shorts who will go again (as they have in the past)
Big overhang coming from founder sell down !!???
Last week we saw 5.5m shares in Afterpay shares placed (Bell Potter & Citi) the placement price floor was $6.90 (with bids in 2c increments ) but due to strong insto demand- that saw the price covered at $6.90 then $6.92 & thus was then triggered at $6.94.
This line has been well talked about (about 2.5% of coy) with founders selling down.
This “overhang” was pushed by the “Shorts” & those brokers who were pushing it as a sell - as (one of the) reasons to be short!.
Now the issue for them was that they pushed this “Overhang” as one reason to sell/ short
only problem is that the share price was $5.50 at the time & , so it’s actually rallied +42% despite this perceived “overhang”..
The shorts also tried to get a kick with (apparently) a naughty teenager (who was an adult!) buying alcohol with a 'fake' account
Trying to worry the mkt that a teenager bought alcohol through Afterpay was a big effort - as its very very hard & takes a lot of time to find those who sell alcohol. In fact you can't do it unless you find one of those stores that sells say flowers with a bottle of champagne to go with them. So the reality is that it’s almost like a Lotto win trying to find one of the 19 or so 'wine merchants' out of thousands that they could do this with & the joke that was missed by all was that when the alcohol was delivered guess what .. they had a “adult sign for it”– and it was sent to "work premises" no one was told us that at the time - it came out after !!.
Poor advice caused by misinformation - until more brokers cover this can happen
I even the other day that someone was told by their (retail) broker tosell all their Afterpay as they were convinced that some really bad news was about to come out.
So they did (at $6.70) – but nothing “bad” came..
But I heard yesterday what this "bad news was" ... The broker had it on "very good authority" that Afterpay had "no cash" & was only financing it via credit from the owners... Given they don't follow the coy they instead relied on this "very good authority"
So they got their client to sell out...
When this guys accountant heard that - he looked at the last balance sheet (for just 4 minutes) & saw plenty of cash & this was totally not true.
The client I understand is furious & is desperate for the stock to come back to $6.70 so he can buy back in - even if it doesn't get there he will buy back in..
So this is the type of misinformation that seems to be out there... but who I ask starts this sort of rumour /? I mean who can benefit from it ??!!
Bottom line is that earnings & revenues are the ultimate judge of a company - not unsubstantiated rumours.
The other factor that the shorts seems to completely miss was Afterpay going into the US.
I did hear a few who said it’ll be very hard to crack the US & some were doubtful - & others were so convinced that they were going to fail -m that they were wanting for a US launch announcement & they they were going to short the Cr%p out of it .. good luck !@ Your fellow shorts seem to have realised that is not really a great strategy - especially if this stock signs up multipe others
so the announcement the other day that their US launch has kicked off with an incredible first customer –the giant - Urban Outfitters Inc,which is one of the largest lifestyle fashion retailers in the US (Urban Outfitter’s annual sales are US$3bn, which …. Wait for it & this is not even a exaggeration --- is the same size as the total Australian online fashion market. Urban Outfitter’s has a minimum 2 year duration for up to 5 years.
Also – which was like a smack across the face of those (once happy) shorts - the rollout of positive announcements will continue all year – as they said APT has over 50 retailers who have signed contracts or term sheets to use Afterpay in the US (now this is Aust retailers selling into the US BUT also US based retailers as well – so they are going a lot wider a lot quicker than anyone thought possible).
These retailers include Cotton On, Lorna Jane, Morphe Cosmetics, Showpo, among others.
Having urban Outfitters is such a massive coup fro Afterpay
While excited about the possibility of the likes of North Face, Tommy Hilfiger transporting the success seen in Australia across the Atlantic to launch Afterpay –that pales with the possibilities opened up by Urban Outfitters and their thinking in taking on such a fledgling concept.
If there is one retailer which has a natural empathy with Afterpay’s target audience, millennials who shop for fashionon line who are either excluded from or reluctant to use credit cards its Urban Outfitters.
My college in the UK Phil Beard commented that his reading US retail analysts reports on the group which also covers Anthropolgie and Free People it is clear its target is to be the leader in the on-line experience.
Looking at the experience of The Iconic over ASOS in Australia, Urban Outfitters clearly saw a need in being the first mover.
Smart retailers do not suffer from an excess of altruismso if a giant like Urban Outfitters, which has a turnover equal to the Australian on line fashion sector,sees the potential of Afterpay – one should ask are the Australian institutions are on the right side of the story.
Afterpay has been the biggest thing to hit Australian retail in decades and could be our biggest export in the US space since Frank Lowy took Westfield shopping malls across the Pacific.
No one should be underestimating Afterpay after they have Urban Outfitters on side – this is a major coup for the company & one that could really explode as it takes off…
If there is one stock I wouldn't bet against it this one...
A few recent Afterpay signups in US are ..
In the US some that they have signed recently (go to their US web page) include frank body, Jewel Toned, Designer Revival, June & January, Gusto+co, Freddy, Spitit Hoods, Rhone, Princess Polly, Beautiful Bakerie & Pawlicious (yes a dog beauty store)
Competition in the US appears limited to credit providers operating using the lure of interest free rates
Sezzle , a Minnesota based group, offers similar payment terms to Afterpay but do not appear have the same pull with the fashion names having only 500 stores on its network.
Afterpay In Australia has already (in just 2 years) has 14,000 retailers up from 6,000 a year ago (with 2m customers)...
Afterpay in Australia now accounts for25% of all "online" Australian fashion sales and 8% of all retail sales.
Google search indicates Afterpay is getting some interest in the USA
This is a Google trends -the blue line shows Afterpay & its interest has increased 4 fourfold in the last month since the US launch.
Also as can be seen they have overtaken their US Sezzel
Google search of Afterpay vs Sezzle - worldwide shows how successful Afterpay has been in Australia
The Visa result recently - is telling up that Afterpay should kill it in the US
Ok firstly lets re-iterate a misconception – that Afterpay is a “Credit Card” ..(this will make sense on why I'm saying this in a minute)
It’s not…
The vast majority of users of Afterpay
(1) are repeat customers (over 90%)
(2) don’t experience any late fees (approximately 93% pay on time)
(3) are made using a bank issued debit card(approx. 85%)...
What we saw with the Visa result a few weeks ago & was quite amazing…
There is an argument that the Millennials are moving away from credit to debit cards & this was proven in the Visa resulta few weeks ago.
This is big news for Afterpay as Millennial use of debit cards (or more pointedly aversion to credit cards) has been a big driver in the numbers..
So Visa is slapping us in the face & telling us (indirectly of course) that Afterpay’s the US strategy which will leverage heavily on the highly successful Australian experience where deferred payment are enhancing the appeal of Debit cards
Visa result shows “Debit Cards” are more popular & use is growing strongly..
Visa result showed that spending on Visa Inc. debit cards — the favoured plastic of the younger set — continues to grow at a faster clip than on credit.
Visa said spending on the firm’s debit cards jumped +16.3% in this year’s first three months, helping the firm raise its financial outlook for 2018 – while Credit-card spending rose 13.7%.
Younger consumers prefer to pay with debit cards or even cash after cultivating an aversion to credit while coming of age during the financial crisis. They also don’t typically qualify for top credit cards until becoming older. Visa, the world’s largest payment network, generates more-lucrative fees from credit-card use yet has a larger debit business than rival Mastercard Inc.
US is a massive market & you only need to just make a small dent to make it...
APT describes the market opportunity in the US as “substantial”, highlighting that the US online fashion market is 20 times the size of the Aussi mkt .. ie US$60b vs Australia US$3b and the US millennial market is ~63m, versus ~6m in Australia.
ASX 100 company in the making
That announcement on the US again indicates we could be looking at a Top 100 ASX coy in the making-in the years to come. APT’s mkt cap is now $1.6billion & over time – if this US strategy works - could see its mkt cap at $5billion (or about $24 a share)– but we have a long way to go before we get there..
Shorts have “panicked” many of the shorts in Afterpay were the classic “me too”– in that many only shorted because they saw the short interest was increasing & thus thought that if others were shorting then they too would short & hope the others knew what they were doing - clearly they didn’t..
The shorts as chart below shows was a one way move – up, from 1% in November to 4% in Feb & that accelerated to a record high of 9.86% on 7th May. Since then the shorts have been scrambling to cover.
The short interest has decreased from 9.86% on 7th May back to 5.28% .. ouch …
Shorts in Afterpay
May 8 they peaked at 9.86%or 16.2m shares (capital base 164m shares)
Now 5.3% or 11.5 m shares (capital base 217m shares - after founders escrow stock came out).
So shorts you could argue have gone down by 4.7m shares-
BUT
on the old capital base (ie before shares came out of escrow) the shorts have gone from 9.86% to 7% --- so the short covering has not been as aggressive (yet) as the chart suggests.
The shorts do have (from what I can ascertain) still 2 beliefs that could see the stock come back Ok most of the issues that the shorts (and competition) were hoping to come to fruition have not amounted to anything, but maybe they still have just 2 arrows left in their quiver ... (1) They get regulated by ASIC
The main one is they are hoping for some sort of "regulatory overview" from ASIC (whom Afterpay approached & have been talking with happily for over a year) that they hope would curtail their growth - this has been talked about a lot is it a credit provider or not - they don't charge interest - but are late fees interest ? So is that interest ?? But they don't have account opening fees & don't have fees to keep the account open ?!
BUT how can it be a Credit company when a massive 85% of the customers use debit cards to pay anyway (ie only 15% pay with credit cards) ?!!~
This "need for regulation" is also being pushed very hard by their "competitors" who are very worried that Afterpay is becoming so successful (which it is) at such a rapid rate that their own products will one day be swamped by Afterpay.
At present Afterpay in focused on say $100 to $500 items. But if they get more successful maybe they extend into bigger ticket items - that is where the competitors are most worried - not now - but having see how successful they have become - one day they may well be coming for them (and sooner than they had ever realised) .
So if they can kill off (or at least curtail the growth) of this very successful, fast growing coy before it gets really established then that gives them 'breathing time'...
Going on from this point - if they were to get some regulation - they this is a one off event - after that they'd possibly have their wings "clipped" at worse -but then that whole issue (that is seen by the shorts to be a big overhang) would be dealt with, removed & the coy then just sails on & can out its spinnaker up ..
(2) The US fails
I assume another reason is that they "fail in the US".
But before we look at this -most shorts never focused on the US launch- they were mostly banking on some type of regulation coming in a while ago.
So many never thought they'd have to now contend with the US..
But now its happened - they can only hope that Afterpay fails in the US, if they are correct then Afterpay shares will come back a lot (maybe -30%)?? as that is where their big growth avenue is & also why the PE of the shares is so high..
The 2018 PE is 124x but that (due to rapid growth) comes down to 62x in 2019 (EPS growth +100%) & to 37x in 2020 (EPS growth +66%).
So that is very high ... BUT if the US takes off - then as we saw with A2Milk when their sales went up rapidly..
Remember A2 Milk - it looked very "expensive on 27x" in Nov 2016
November 2016 (forecast numbers) - (EPS in NZ$) share price $2.11 EPS for 2017 EPS for 2018 8.1c (PE 27x) EPS growth +87%10.3c(PE 21x) EPS growth +27%share Price $2.11
Now to TODAY (so what happend)share price $10.00 EPS for 2017EPS for 2018 12.2c (PE 93x) EPS growth +183%24.7c (PE 46x) EPS growth +101%
As China baby formula sales surged for A2M so did EPS - the mkt thought they'd earn 8.1c in 2017 but instead was 12.2c (ie it was 50% MORE than mkt had expected) & 2018 EPS was expected to be 10.3c BUT instead it looks like it will be more like 24.7c (and 33c in 2019!!!)
So the point is, that just because Afterpay is on 62x 2019 numbers - it looks very expensive (especially to a value manger ) & a SELL... BUT the market realises that if the US takes off, then the EPS will go up rapidly & the PE will drop just as quickly - very much like what we saw with A2M ilk over the last 18 months...
But as said -if the US failed (which is hard to see) then the share price would get crunched as Australian growth is not enough to justify a PE of that magnitude.
US valuation "doubled" !!!
On the last point the Bell potter analysts - Lafitani Sotirou - whom I consider one of the best analysts in the market (and by a long way) & one who has an excellent track record across the financial space recently pointed out that..
US expansion very much on track
APT has confirmed strong interest in the US to utilise Afterpay, with over 50 retailers signing contracts or term sheets. One of the names include Urban Outfitter Inc., which has sales volumes of ~US$3 billion, which on its own is roughly equivalent to the total Australian online fashion sales. This is a material announcement and bodes well for the US expansion.
Laf said that he is yet to include any revenue figures for the US expansion and will hold off until we get the first update from the company.
However, we do already include some additional costs in our estimates to account for the US opportunity.
At this stage, however, given the strong interest from retailers in utilising Afterpay and the high calibre team,
we have doubled our US based valuation from $100m to $200m, resulting in an upgrade to our Price Target to $10.41(previously $10.00),
Buy recommendation remaining unchanged.
There remains material upside to the US valuation if the company can prove proper take up of the product.
Disclosure: Bell Potter Securities acted for APT in the Block Trade of 5.5 million shares in May 2018 and received fees for that service.
