Afterpay {17.08 0.97 6.02%} BUY A lot has happened in the last few weeks – Firstly just on the share price
Stock went on a tear rallying from $14.20 in mid-August to $18.55 on the 22nd August. Then then reported a great result, a capital raising, and a small acquisition & announced they are going to enter the UK.
That saw a $108m placement that was heavily oversubscribed & a number of new instos came onto the register.
Stock came back on and rallied to a (very brief) high of $23 that day & closed on the 2nd day after at $21.13.
That’s when the selling pressure started to hit.
A number of instos who took stock would havedumped their position either in the first few days or later as it was falling. Even though it was oversubscribed – when a stock if fallingyou don’t try & catch the falling knife – you have to stand back & wait for the dust to settle & all the hotmoney to have exited.
They were also “double hit” as we also had a general selloff in high PE, high beta stocks at the same time.
Also the shorts would not have been able to hold back at those levels & it’s a lot easier to short when the momentum has moved from uptrendtodowntrend.
How far should they fall is always a question that many ask.
Sometimes when you have a big rally & then you get a pullback – many tend to look for a 30% pullback as a guide to where it should find support & that can be too low.
Ok if we use the closing price on the 2nd day after the issue of $21.13, then the -30% pullback level would be all the way back at $14.79.
Well last week on Friday it got to a low of $14.95 – so it will be interesting to see if that level proves to be the low in this selloff. I suspect it will – but with all these type of stocks then tend to rally further than you think & equally can selloff more than you think.
Instos have been impressed
I went to a number of institutional presentations by the company & they were packed & the quality of the instos there was gold class.
That doesn’t mean they bought any, but it means at least they are now aware enough of the company that they want to know more.
A few said that after the presentations by the company, they were very impressed with what they had achieved, how they had executedso far & the growth that the company has ahead.
So I suspect by the end of the year we’ll see some very high quality instos on the register – who will be there for the “big picture”.
I have below included some comments from the presentations I attended.
The big picture is 3 years not 3 weeks
As I have stressed this is a 3 year story & that means the stock can & will be very volatile over time.
Any stock that trades on an astronomical PE will always do well when markets are rallying (as its high growth) but will suffer short term aggressive selloffs when we have marketsunder pressure as investors generallysell their high beat, high PE stocks & park their money in safe, boring low PE stocks.
But once the dust settles& the market selloff has run its course, these are the stocks that have V shaped recoveries.
So if you own Afterpay & you are in on a 3 year view then nothing that has happened in the last month should worry you.
You should just ignore the share price gyrations (up & down) & look at what the company is achieving & that is what will drive the long term value (I won’t even mention where I think the share price will be in 5 years – it would sound total ridiculous) .
Stock is back the where it was 3 weeks ago
Ok the share price rallied to $23 very briefly (but ignore that that was a flash) still last week the stock was smashed -14.5% for the week back to $15.50 (low was $14.95, a drop for the week of -17.5%), but the week before it had rallied +18.5% from $16.61 & the week before that it had rallied +14% from $14.57..
So all that has happened is that stock is back to where it was 3 weeks ago & if anything the company is in farbetter shape & doing a lot better now than it was last time it was at this price.
The UK is another company making move
The move they are making into the UK is huge – it’s a company making deal & has come far earlier than anyone would have ever imagined. BUT – these are just initial moves – they think it will be about 6 months before then enter properly.
UK acquisition was not about the technology but about the people capability – they wanted their relationships.
Their technology is global scalable based on the cloud.
In the UK they acquired of 90% of ClearPay Finance Ltd, a UK-based buy now, pay later business for 1m APT shares – they will use their own technologybut will use the skill of the local employees, for their relationships with retailers, banks & regulators – so is a very smart move.
The same team that built NZ & USA will build UK.
They see this as synergistic with the US.
So this is a massive move & again if it is a success – then it just cements a very powerful long term picture.
The US is going to be huge for them but to me they are like Amazon… I still see stock going to $24 (and beyond) as they continue to do well here but the US continues to look a lot better than anyone expected 3 mths ago.
They are chasing revenue and market share because first mover advantage is key. I think of them as being very much like Amazon years ago – ignore the valuation / PE (and please just ignore the “value instos who feel they have to bag any company that has a high PE)
They are playing for a much bigger prize (1) Capturing the market, (2) Become the dominant player & (3) Get 1st mover advantage – they are still years ahead of any serious competitors. The US seems to be going very well
In fact I had someone who told me they have a friend who is in the US competing with Afterpay & said they don’t like praising their competitors – but he was amazed at how it was being taken up & it was killing them & they said Afterpay is getting that 1st mover advantage & it’s hard to come in after them.
When I was in the US late last year while shopping with my daughter in fashion shops – I asked every one if they had anything like Afterpay & all said no – but all thought it’d be used a lot if it existed. So I still believe this will be a lot bigger in the US than anyone realises. Also Americans & Australians are very similar – so if it works here with consumers – there is no reason why it won’t be mirrored – with the same success – over there.
The US is going so much better than expected (social media indicates this) & the fact thatthey have over 400 retailers in the US transacting on the Afterpay platform currently (up from over 200 last month & they have 800 contracted).
Thus far in just the first 2 mths (and don’t forget given the time frame of re-payments, 42 days, this could (will be) now be a lot higher) they had done $20m of sales with 150,000 customers already.
Fashion & Beauty is 4x bigger in US vs Aust online.
In the US it’s a huge competitive market,andretailers talk to retailers– so is something is working they all want to know about it.
There is also “global leverage” from retail websites that sell elsewhere (but there are logistical issues that need to be sorted out before they can offer into other countries via a global retailer’s website)
The chart below shows Google Trends on Afterpay in the United States.
It shows that awareness & use of Afterpay is increasing all the time.
This is a relative, not absolute, measure. This is done by taking all of the interest data for your keywords and dividing it by the highest point of interest for that date range. This can be ridiculously confusing because you can see a declining trend in interest even if absolute query volume is increasing.
The numbers signify search interest relative to the highest point on the chart for the given region and time.
So in other words - a value of 100 is the peak popularity for the term (which you can see is where APT is)
A value of 50 means that the term is half as popular.
In other words this is a relative scale, each point is graded relative to the highest value, which is given a score of 100.
So each highest point on the rise that started after the launched in the US in May - would have been given a score of 100.
So Aug 26-1st Sept was 100, it’s now 85, so there has been increased interest of 15% since previous week.
Urban Outfitters CEO made an extraordinary comment when said Afterpay has been a “huge success” Why is that is extraordinary to me - is that Afterpay has only been “live “for just 2 months – that tells me it must be making a huge impact to their online sales.
Urban Outfitters I think is one to watch – in their last result a few weeks ago they had only had Afterpay for just 2 monthsBUT as Richard A. Hayne Chairman & Chief Executive Officer, Urban Outfitters, Inc said
“So more choice is one of the drivers, more convenience. What are we doing there? We are continuing to improve our customer segmentation and personalization, and so we get the right messages to the right people. During the quarter actually we’ve added more paymentoptions like Apple Pay and Afterpay, and Afterpay has been a huge success. And we’re very proud of the fact that we’re the ones that piloted that program in other states.”
He didn’t bother to expand on Apple Pay but did on Afterpay – so in just 2 months it made such an impression on him that he commented about them being a “huge success”. When Urban Outfitters reports their next QRLTY result around the 20th November, they will have had Afterpay live for 5 months & if it has made an impactthen we’ll hear a lot more next time & I’m guessing we will all be amazed..
Urban Outfitters 3rd QTR sales were up 10% …
Don’t forget Urban Outfitters have 8 million Facebook followers & do US$1billion in online sales!!
They are moving now into the UK (it was “retail led” rather than coy led) but after the UK they will eventually look at Canada, Europe and parts of Asia. This is now just a matter of when.
Capital Australia
have a $350m NAB Australian facility
have established a Australian Bond $50m
So Australia
NAB$350m originally (but that is back to $300m as they did the $50m Bond recently – 4 year term)
Citi$200m Australian facility
TOTAL =$500m.
International
$25m in Cash at 30th June
Can draw down $100m
$130m from placement / SPP
Total Cash to Fund International Operations$250m.
Which means they can fund up to $1 billion in Sales on this before they need to increase. (don’t forget in the US in first 2 mths they have $20m of sales with 150,000 customers already
So at that rate they are running at $120m pa in the US – but I suspect that number will be massively higher in the next few months, after we see 3 more moths of US sales.
For a $100 sale its 85% debt funded & 15% from Afterpay’s cash reserves.
They have a short receivables cycle.
So a $500m facility with 12x turnover of capital, allows them up to $6billion a year in sales
Brands / retailers
Have 17,000 Retailers
10,000 shopfronts
Instore is at this stage just 15% of revenue. I went into JB Hi-Fi on the weekend & asked if I could use Afterpay. The shop assistant said they didn’t have it – but “after the number of people who keep asking if they can use it – I think we should get it.”
Afterpay can see there is huge upside if they can penetrate shopfronts & the Department Stores.
They have ...
2.3 m active users
85% pay with Debit Card (but I have linked to my credit card)
Average purchase $150
Average number of transactions a year 9 (up from 8 previously)
The longer they use it – the more transactions they do.
Bad & Doubtful Debts
The company has been achieving extraordinary levels of growth & their net transaction loss is 0.4%downfrom 0.6% in 2017.
The reason is that they have so many ‘repeat users” so it’s less risky.
Most customerspay off their loan & then use again – returning customers account for 90% of monthlytransactions.
They have “tight limits’ – so it’s different for a credit card.
The average purchase is $140 to $150.
90% of balances are less than $500
75% are less than $350.
So when I hear that some are worried about people getting into ‘too much debt” – they simply don’t understand the way Afterpay works - nor its limits
It is not like a credit card where, once you initiate that debt, if not paid - it just keeps getting bigger. With Afterpay – if you don’t pay back your account is frozen – so debt does not increase over time.
So unlike a credit – with Afterpay you cannot “kick it down the road”.
They check every transaction before it is approved or rejected.
If someone wants to pay off too quickly or tries to do multiple transactions in a short time – they will reject them & watch the account for fraud or irregular activity, before allowing any more transactions.
Quite interestingly they are carefully who they lend to & how much – as is shown by the fact that they “reject 30%” of transactions.
Going vertical
They are moving vertical & have moved into travel – with Jetstar (in fact I bought a ticket on Jetstar last week & joined up to pay with Afterpay (finally) – was so easy & took 2 minutes),
They have recently moved in Health (dentists – via Primary Dental Clinics). Here is you need clean, X-ray or small extra costs that were not expected – this gives them the ability to use Afterpay to help.
Lay-by vs Afterpay- will Afterpay phase out Lay-by ???
I find a number of people say –this is just a new fancy way to lay-by
Lay-by in Australia is the same size as online.
So will Afterpay phase out lay-by???
Well Que had lay-by & Afterpay & customers could do either. They found that customers with the new choice went 95% to Afterpay& 5% stayed with the traditional lay-by.
With Afterpay vs lay-by
For the store it means they have more space as they don’t need to store the lay-by product (as customer takes immediately).
Retailer gets paid immediately (rather than over time)
It means that their Inventory turns at a faster rate.
Are they growing too quickly?
This was one question a number of instos asked.
They have been building the global network for a while.
So they have been preparing for this for a while.
Sever to the cloud took time, but it is now done & so they can now deploy into different regions.
They have global & local based teams –they get data insights on the global platform.
So they have a global scaleable platform, 15% of new work is required in a new country.
ASIC - regulation
We have heard a lot about ASIC looking at “buy now, pay later” for a while.
Afterpay have been actively engaging with ASIC on this for a long time.
ASIC know the difference between different products – i.e. interest free vs ongoing fees.
Afterpay are very “transparent” about charges – “Late fees” are capped at the lesser of 25% (min $10) of the order vale or $68.
So if there was a $200 purchase the first late fee is $10 & then if not paid off - the maximum late fee (if not paid) would be $50. That number then is static it never increases (as it would if they charged “interest” as credit providers do).
Also no late fee - no matter how large the order - will be over $68 – that’s it – no hidden charges or fees that cancontinually hit & make the debt escalate.
They did this because “it was the right thing to do”...
So you cannot “kick it down the road” for a “fee” (as other credit products allow & hence a small debt can grow significantly over time is not paid).
So there will eventually be something that comes from ASIC as they consider the differences between them & credit providers.
APT Price at posting:
$16.57 Sentiment: Buy Disclosure: Held
