Afterpay Touch Group (APT) Power of the Network Effect
Growth Accelerates in the USAPT confirmed it has surpassed 5m active customers in the US, with at least 9m in the US having downloaded the app or made an initial purchase in the last two years.
This is ahead of our expectations, where we previously had 4.85m (revised 5.4m) active users by the end of June. Instead, the COVID-19 related cuts we pushed through in March appear to be too conservative, and in fact, APT is accelerating its growth rate with daily new users up 30-40% in the last 10 weeks versus what was experienced in January and February (before the COVID-19 impacts were felt).
It appears Afterpay is benefiting from the shift to online purchases, where it secured over 80% of its transactions in 1H20.This follows the announcement that Tencent has taken a 5% stake in Afterpay, and that the company remains committed to entering new markets with Canada on track for later this calendar year. There is a string of possible future catalysts including any updates on the Tencent, VISA, or Master Card collaborations, news on how eBay is tracking, or confirmation of any new markets outside of Canada.Power of the Network EffectIn the release, APT confirmed it provided over 10m referrals to its retail partners in the US, which is around 700 referrals a month per retailer – a feature many observers of the BNPL space underestimate, and that is the network effect of Afterpay. Many of its peers do not have a directory, or have one without the scale and traffic of Afterpay.
Earnings Revisions Following APT’s media release update, we have upgraded our underlying EPS by 1.2%, 9.0% and 8.4% for FY20, FY21 and FY22 respectively. The key driver is higher customer numbers in the US. Further, our underlying customer growth numbers have changed by 6.6%, 7.3% and 7.4% for FY20, FY21 and FY22 respectively.Following these changes, our Price Target is upgraded to $51.50 per share (previously $45.95 per share), with our Buy recommendation remaining unchanged.
Disclosure: Bell Potter Securities acted as a participated in the June 2019 $317m placement and $100m sell-down and received fees for that service.Recommendation:Buy (unchanged)Last close price:$42.89Price Target:$51.50 (prev. $45.95) Lafitani SotiriouSenior Analyst
APT Price at posting:
$43.85 Sentiment: Hold Disclosure: Held
