@bruutz82
If you use these valuation techniques you will:
- most likely preserve capital
- never be able to invest in companies like Afterpay
1) your calcs are wrong
- should be ~40m revenue off 1B sales
- implied ROIC should be much higher- average payback period is 30 days giving ~12 cycles pa, with a net transaction margin (NTM) of 2% this gives 24%, take away 4% (arbitrary) for stay in business expenses and you get about 20%
2) implied- reverse valuation (lots of rounding below)
Current sales run rate is about 2B (last quarter) and was growing at +530% over the last 12 months
Assume exponentially decay by 50% pa and you can guesstimate 200% growth over the next 12 months
Lets be conservative and say 100% growth over the next 12 months is achievable- so CY18 exit 4B sales
Average margin is 4% giving revenue of roughly 160M
NTM is roughly 2%- gives 80M gross profit
Earning a net margin off this of 50% (highly achievable) gives a net profit of 40M
The implied 12 month forward PE is therefore 215*6.50 ~1.4B/40 = 35. The implied PEG ratio for this is 0.35. In the context of the wider market (look at Amazon for instance)
3)There are definitely risks:
- margin erosion with competition
- greater than exponential growth decay
- any of the rough calcs above being unachievable
- execution failure
- bad debts (I think this is vastly overstated- most bear theses I have seen have not used the appropriate numerator/denominator. The best approaches are to look at NTM and/or bad debts/sales keeping a close eye on the provisioning in the financial reports).
- regulatory risks: contrary to what market commentators say, in my opinion, a common sense approach to the fees suggests that they are fair (they represent about 2/3 of bad debts).
4)Qualitative pros:
-There is also evidence of a competitive moat, contrary to what most commentators say
- low cost of capital- already at scale (compare with likes of competitors- AfterPay is very very very well placed)- compare with funding achieved (Crunchbase) of eg. Sezzle, and look at how rapidly AfterPay has usurped the likes of Laybuy in NZ
- established first mover and market leader in Australia
- strong VC backer for US market move
- very very very low cost of customer acquisition- by far the lowest cost of any business that I have invested in, and I suspect comparable to the likes of facebook, Amazon (although to be honest I haven't done the maths). There is no-one close in the Australian market. The distribution list alone is worth a lot.
- enormous total addressable market, in a type of market that does confer a strong first mover advantage (a la a marketplace) and where the advantages of low cost of capital will make a very big advantage
- long tech history in the acquired touchcorp- although Touch listed late it was an old business since about 2003 if I am correct
- established retail partnerships with international retailers (not to be underestimated)
5) Where can this end up? My thoughts/opinions only below.
I have absolutely no idea and am not engaged in the practice of prediction! I think valuation is fair and I am sitting on large profits on this position so it makes sense for me to hold. If I was trying to build a position now I would be buying only a small % of my final position at this moment- news is forthcoming over the next month.
In my mind there is an asymmetric risk/reward here. If the model fails, with detailed analysis and preparation I should be able to get out at a maximum 50% loss. If Afterpay executes globally, this will be a minimum 10x from here (and most probably 100x). The Australian market is maybe 10% penetrated when you add in in-store and other segments (such as travel), and the US market is 10x bigger. Moreover, as it a business model that fundamentally should scale relatively well, once proven it is just a matter of funding (and really copying what is working in Aus/NZ- some % capital and then receivables lending) the growth. The potential payoff is then 10-100x and the potential loss maybe 50%. I am probably over-estimating the probability of success (but in my mind it is at least 50% or that vicinity, not <10%), but putting it all together it is a very very high reward/moderate risk situation and probably rates third on my conviction stakes.
For me this is just one of those cases where I can't afford not to be in (as predominantly an ASX investor). It was initially <10% portfolio position but is now in the order of 15% after its growth and I haven't sold a cent....will see how it pans out!
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