APT - Afterpay Limited

[CNHTractor]

Marcus Padley writes in his newsletter today:

Seems never a day goes by without Afterpay (APT) in the media. This time the SMH and The Age are carrying a story on the company accessing electoral registers for credit checks. The company has done nothing illegal in this and is a result of changes the government brought in to help authorities track money laundering and terrorism. APT is not the only company using the Illion (formerly Dunn and Bradstreet) data service. Betting agencies also use it as well as other credit providers, David Jones, Nike and Officeworks. The media seems to enjoy trying to take APT down. It has so far survived the Senate grilling and has stressed its responsible practices and business model. Yet another storm in a Tea Cup for the company.

 

[HelloU]

per the discount ...... odds are the non-user customers will also help subsidise the users ....
"reverse search" is happening. Users are beginning to search for products only via afterpay sellers. Sites are being designed for this outcome.

young peeps do not like credit. they like debit. and like to have their money in their debit account longer.

and direct thru nab app ..........

 

[bigdog]

Today's Herald Sun - update on yesterdays govt hearing "Credit and financial services"

ASIC GENTLE ON ‘PAY LATER’
Herald Sun - Friday, 25 Jan 2019 - Page 59

FEARS of a crackdown on the buy-now , pay-later industry have eased after the corporate cop told a Senate committee a light regulatory touch through the proposed expansion of its product intervention powers was a sensible first step.

Australian Securities an Investments Commission senior executive leader Michael Saadat told the committee, which is inquiring into the extension of credit to vulnerable Australians, that the reform would enable the regulator to address any consumer harm by forcing providers to adopt more stringent safeguards.

“If consumers are (still) experiencing bad outcomes, we’d recommend further reform,” Mr Saadat said yesterday.

A gulf this week emerged between industry leaders Afterpay and Zip over the most appropriate regulatory framework.

ASIC’s position is supported by Afterpay.

Zip, however, proposed a tougher approach incorporating a scaled-down version of the responsible lending obligations that apply to mainstream lenders.

Chief executive Larry Diamond was yesterday optimistic Zip’s framework would be adopted.

“We support increased oversight, and the granting of the product intervention power is a sensible move,” Mr Diamond said.

“We’d hope under that power that ASIC would look at some minimum standards for the sector, and we’d be very happy to work in consultation with ASIC on that.”

Mr Diamond told the committee real-time bank statements were used to verify income and expenditure, and the company did not target customers at risk of financial hardship.

 

[So_Cynical]

Bell Potter: Our analysts share their outlook and top stock picks for 2019.

APT Price target of $23.63 ~ one of a few stocks that get a mention.

https://www.belldirect.com.au/smart..._direct/pdfs/Analyst_Stock_Picks_for_2019.pdf

 

[leyy]

There is a good I'm depth article that really illustrates the big picture of afterpay's business model and it is about building a platform / market place using big data to connect retailers and merchants to consumers.

Think of Amazon, eBay, air bnb, uber and Facebook.

Think of the marketing and advertising opportunities in the future for retailers.

The biggest difference is that it won't be in direct competition with the retailers but more of a another distribution channel with ample marketing opportunities.

It will be critical for afterpay to be able to shift and pivot to this sustainable model.

I think there is real potential here long term.


https://www.afr.com/business/bankin...ng-retailers-with-millennials-20190125-h1agzt

Cheers
Leyy

 

[bigdog]

https://au.finance.yahoo.com/news/afterpay-share-price-charges-higher-015119754.html

Article Friday Jan 25

Afterpay share price charges higher as regulatory risk subsides
Afterpay Touch Group Ltd (ASX: APT) share price has charged 3.78% this morning as the threat of regulation appears to be waning. At the time of writing, Afterpay shares were trading at $16.19 per share following this week’s grilling of “buy now, pay later” chief executives from both Afterpay and rival Zip Co Ltd (ASX: Z1P)." data-reactid="22">The Afterpay Touch Group Ltd (ASX: APT) share price has charged 3.78% this morning as the threat of regulation appears to be waning. At the time of writing, Afterpay shares were trading at $16.19 per share following this week’s grilling of “buy now, pay later” chief executives from both Afterpay and rival Zip Co Ltd (ASX: Z1P).

Now boasting a market cap of $3.65 billion, the biggest risk to Afterpay’s growth trajectory has always been the looming threat of regulation by the likes of ASIC if the company was deemed to be a credit provider. This latest Senate inquiry has been scrutinising the business model of Afterpay and its fellow competitors, and looking at options for further regulation in the “buy now, pay later” industry.

Afterpay strenuously denies that it is a credit provider, as its business model does not actually extend lines of credit to its customers. Instead, customers pay off their purchase in four equal instalments over a set period of time and are subject to pre-determined “late fees” rather than interest expenses seen on traditional credit products such as credit cards.

Afterpay saw stratospheric growth in 2018 as its share price exploded on the back of consistent outperformance on its sales numbers and a successful expansion into the USA. The share price closed the year out at $12.40, a 1-year increase of a tidy 94.36% for investors in one of the big success stories of 2018.

I think the tone from ASIC in the latest round of Senate hearings indicates the regulator may push for greater supervisory powers without restricting the current business model of Afterpay. This thesis is also supported by the corporate regulator’s report just months ago that found that powers to intervene in the sector should be satisfactory rather than regulating Afterpay under the much more restrictive Consumer Credit Protection Act 2009.

Markets appear to be on the same wavelength in this regard, with this morning’s early gains indicating that the upwards trajectory for Afterpay could be set to continue ahead of its mid-year results release in February.

 

[tinhat]

On the positive side, I would imagine that there is a lot of value to be captured and monetized from their customer data as a market intelligence and promotional asset alone.

On the plus side, I can imagine this business not needing to generate any return on the funds deployed as credit as I expect there to be potentially more value in using customer data as market intelligence and opportunities of working with merchants on sophisticated direct marketing through the platform.

Despite my concern over the long term viability of the business model, I do agree that with you that this could fly in the short to medium term. I notice there is a gap in the chart between $14.45 and $15.10. I'll add this one to the watch list.

There is a good I'm depth article that really illustrates the big picture of afterpay's business model and it is about building a platform / market place using big data to connect retailers and merchants to consumers.

This is the sort of sharing of info and ideas that makes these fora worthwhile.

My thinking is that underlying the model is a valuable technologically driven marketing platform (in the old people's speak, "direct marketing") business.

The risk is the financing model, my perceptions of which precede this comment.

Happy invasion day.

 

[luutzu]

There is a good I'm depth article that really illustrates the big picture of afterpay's business model and it is about building a platform / market place using big data to connect retailers and merchants to consumers.

Think of Amazon, eBay, air bnb, uber and Facebook.

Think of the marketing and advertising opportunities in the future for retailers.

The biggest difference is that it won't be in direct competition with the retailers but more of a another distribution channel with ample marketing opportunities.

It will be critical for afterpay to be able to shift and pivot to this sustainable model.

I think there is real potential here long term.


https://www.afr.com/business/bankin...ng-retailers-with-millennials-20190125-h1agzt

Cheers
Leyy

Everything is possible. But all possibilities there need new cash.

Saw recommendation of $20 a share? So that's around $5.5B for the entire company?

I mean, if you're offered $5.5 billion for a loss making company that's still losing hand over fist and expanding that model into bigger, newer, foreign markets. Would you buy it?

As to using customer info, ads... How would that work and would it be enough to earn shareholders their $5.5B back?

Google and FB dominate the online ad space. General businesses won't go on AfterPay to advertise. If retailers and businesses were to place ads, how much would they be charged... and wouldn't that just mean AfterPay will have to lend cash to spend on them items? That's just more risk right?

It's nice to speculate. Just be aware that we're speculating. Collectively, billions are at risk. For a business where if successful to the investor will mean debt trap for people who could ill afford it.

It's just the wrong kind of business to get involve in, on so many level.

But its share price should sky rocket come the presentation about new growthand market gains though.

 

[leyy]

Everything is possible. But all possibilities there need new cash.

Saw recommendation of $20 a share? So that's around $5.5B for the entire company?

I mean, if you're offered $5.5 billion for a loss making company that's still losing hand over fist and expanding that model into bigger, newer, foreign markets. Would you buy it?

As to using customer info, ads... How would that work and would it be enough to earn shareholders their $5.5B back?

Google and FB dominate the online ad space. General businesses won't go on AfterPay to advertise. If retailers and businesses were to place ads, how much would they be charged... and wouldn't that just mean AfterPay will have to lend cash to spend on them items? That's just more risk right?

It's nice to speculate. Just be aware that we're speculating. Collectively, billions are at risk. For a business where if successful to the investor will mean debt trap for people who could ill afford it.

It's just the wrong kind of business to get involve in, on so many level.

But its share price should sky rocket come the presentation about new growthand market gains though.

It all depend's on what the market values the business and what people are prepared to pay for it. It is very normal for companies to be loss making during hyper-growth phase and to be valued so highly.

It took Amazon 14 years to turn a profit.
It took Uber 9 years to turn a profit.
It took Airbnb 8 years to turn a profit.
It took Tesla 15 years to turn a profit.
It took Facebook 5 years to turn a profit.

The story goes on.... All these companies had crazy high valuations and some of these companies were losing billions of dollars annually.

How do you know business and retailers won't go on to AfterPay to advertise? Businesses and retailers probably thought the same thing with Facebook in mid 2000's. Why advertise on a social media platform?

Businesses and retailers thought the same thing when AfterPay when it was initially founded and now it has become a standard to have as a payment method.

The founders of AfterPay have a real long term strategy here and are creating a business model that will a) disrupt the banks/merchants/credit card companies with new payment methods b) create a new platform/marketplace where they are able to better connect merchants with consumers and brands and have more of a personalized approach with marketing and advertising based on your spending habits.

Wrong business to get involved in? Rubbish, we can all name hundreds of ASX 200 listed and Fortune 500 companies that do much more harm to the environment and communities we all live in.

Speculative? No, this is a real business with a business model that is disrupting the retail and payment services industries with a real life use case... Speculative stocks are more like early stage miners digging for resources.... There is no guarantee or real business model or like investing in cryptocurrency... Yes there are risks involved with any investment and business and you have to DYOR and manage your risks.

 

[luutzu]

It all depend's on what the market values the business and what people are prepared to pay for it. It is very normal for companies to be loss making during hyper-growth phase and to be valued so highly.

It took Amazon 14 years to turn a profit.
It took Uber 9 years to turn a profit.
It took Airbnb 8 years to turn a profit.
It took Tesla 15 years to turn a profit.
It took Facebook 5 years to turn a profit.

The story goes on.... All these companies had crazy high valuations and some of these companies were losing billions of dollars annually.

How do you know business and retailers won't go on to AfterPay to advertise? Businesses and retailers probably thought the same thing with Facebook in mid 2000's. Why advertise on a social media platform?

Businesses and retailers thought the same thing when AfterPay when it was initially founded and now it has become a standard to have as a payment method.

The founders of AfterPay have a real long term strategy here and are creating a business model that will a) disrupt the banks/merchants/credit card companies with new payment methods b) create a new platform/marketplace where they are able to better connect merchants with consumers and brands and have more of a personalized approach with marketing and advertising based on your spending habits.

Wrong business to get involved in? Rubbish, we can all name hundreds of ASX 200 listed and Fortune 500 companies that do much more harm to the environment and communities we all live in.

Speculative? No, this is a real business with a business model that is disrupting the retail and payment services industries with a real life use case... Speculative stocks are more like early stage miners digging for resources.... There is no guarantee or real business model or like investing in cryptocurrency... Yes there are risks involved with any investment and business and you have to DYOR and manage your risks.

They're not disrupting the banks or credit provider. The banks have all been in this business decades ago. They left because there's no money in it.

AfterPay certainly disrupts the lay-by business. But beside the fancy app and no annual fees to join, its real disruption is immediate credit with nothing down. Sure, there's that 1/4th pay upfront on clients first loan or something... but that's basically advancing 3/4th to customers without much checking or any collateral. Risky.

If you look at APT's default rate, while its provision grew in proportion to its "underlying sales" figure, the actual write-off increased a couple times higher than the sales did.

The metrics its management is touting is really not the kind of metrics investors should be happy with. It's not hard to give cash strapped people money to buy stuff. Not hard to pretty much pay retailers and take on all credit risk for "4%" fee. I mean, 4% is nothing in retail... I could get that kind of bargain just by asking.


As to being similar to those FANGS... Big difference is that with every new client, APT actually fork out credit and hope that they didn't run away with it.

FB etc., have their establishment costs, have their acquisition costs. So adding another million or two million users costs them practically nothing while their clicks, impression monetization grew in scale.

APT is not that model.

Having said that, given the economic difficulties, the high level of debt etc., AfterPay will definitely "grow" its retailing partner base, grow its customer base... and seeing how the market prices it according to those metrics, its share price will likely keep rocketing up and up.

Just that if we invest rather than speculate, if we look at the underlying business... is it sustainable? Or are they raising capital, borrowing more cash, grow their footprint... all to hide the actual business losses.

Isolating the expansion costs, the admin and general business expenses, APT's own default rate show the business itself is not scaling. That is, with more loans they suffer higher defaults. Defaulted at higher rate than their revenue growth as well as their "underlying sales" [the money velocity].

Here's where their model doesn't work: they lend more to those who [initially] pay on time.

While that sounds sensible, it's not really. I mean, it's easier to repay a small amount than a bigger one. If a person intend to defraud the business, they'd first be nice and sweet and pay on time... then with the bigger amount of loan, they can take and run. More money to take, same hustle.

 

[Knobby22]

I greatly respect your views on many companies but in this case I think that your assumptions are incorrect on two counts luutza.

1. The assumption that the company will struggle to make a profit; even though it has just started and there are massive startup costs they are still making a profit if you exclude depreciation and amortizations expenses (as shown by the figures you published earlier). Getting 4% of each sale is massive and becomes more efficient the longer it goes and the larger the base as software does not cost more because you use it more. This company will spin off massive amounts of cash within two years. To me any other advertising etc. is just a side issue.

2. The assumption that people will successfully pay off a few items and that get so far into debt with Afterpay as they build credit that they can't pay or will deliberately defraud Afterpay. Firstly, with the defraud issue, most people don't think that long term. I am more worried about the initial customers, short termers after any cash.
Secondly, there is a certain pride to be given more credit and favoured status. People love that and hate to lose it, particularly as their friends use Afterpay also. I would not be surprised to see a reward scheme occur once they have finished the rollout in the UK. That is not to say there is not the risk of fraud from professional shysters and it is important that Afterpay ensure they are dealing with real people at all times.
Thirdly, not paying will result in their credit rating being damaged, this is becoming more and more importsant in the modern world. Most people are smart enough to avoid it. Millennials are smart.

 

[luutzu]

I greatly respect your views on many companies but in this case I think that your assumptions are incorrect on two counts luutza.

1. The assumption that the company will struggle to make a profit; even though it has just started and there are massive startup costs they are still making a profit if you exclude depreciation and amortizations expenses (as shown by the figures you published earlier). Getting 4% of each sale is massive and becomes more efficient the longer it goes and the larger the base as software does not cost more because you use it more. This company will spin off massive amounts of cash within two years. To me any other advertising etc. is just a side issue.

2. The assumption that people will successfully pay off a few items and that get so far into debt with Afterpay as they build credit that they can't pay or will deliberately defraud Afterpay. Firstly, with the defraud issue, most people don't think that long term. I am more worried about the initial customers, short termers after any cash.
Secondly, there is a certain pride to be given more credit and favoured status. People love that and hate to lose it, particularly as their friends use Afterpay also. I would not be surprised to see a reward scheme occur once they have finished the rollout in the UK. That is not to say there is not the risk of fraud from professional shysters and it is important that Afterpay ensure they are dealing with real people at all times.
Thirdly, not paying will result in their credit rating being damaged, this is becoming more and more importsant in the modern world. Most people are smart enough to avoid it. Millennials are smart.

If you look at their debt written off/collected... well, from other places, it's not really "collected", mostly written off.

That ratio grown 6.97x versus its receivables of 2.45x, underlying sales of 3.89x.

That shows that default rate is a lot higher as the business scales, not lower or remain constant.

Further, debt written off at $22.759 is about 9% to receivables. This compare to 3.15% in FY17.

The scaling is not reducing the default rate, it multiplies it.

So even if we isolate, ignore, the start up costs as I think I did above, the business model itself does not work.

Someone else pointed out that APT loses a similar amount of money while its sales and revenue grew by a lot from FY17 to FY18... so that could be seen as it's losing less while growing strongly.

But remember that APT raises some $140M in new equity soon after FY18 book closes. They also borrow too right?

You could then look at it as spending new cash from shareholders and bankers, and losing the same amount of cash. Might as well do nothing and lose the same amount.

Its business model is not sound.

And its claims about perfering members who can pay on time, not be late and charged a fee.... that's total Bull.

I mean, sure management can have some creative license in their presentation... but that's just outright lying to investors. Not to mention the "1.5%" default claim they keep on making.

While technically true that they've made provision for that 1.5% default on the entire amount they loaned out... their business model mean that that total amount that is their actual Revenue is not $2.2B but rather some $142M.

So the $32M provision, and the actual $22M in default... compare that to the total revenue is not 1.5%. That's just a class action waiting to happen.

As to the membership preference... if all members were to pay ontime, no late fees. How in the world will APT make their money?

They'd have to either lower the interest expense their lenders are charging, and also demand a higher discount from their retailers.

I mean, if interest expense is some 3.6% while retailer discount is 4% average... who's going to pay for the operating costs, the marketing, the IT guys, the accountants...?

So they're very dishonest.

But yea, I'm just saying what I thought of it. Maybe I'm way off the mark but yea. So far I don't really buy the whole concept of AfterPay as a business.

 

[Knobby22]

I think we will just have to disagree and see how it pans out. The more people pay on time the more they make. Chasing money is not profitable.The next set of results will be interesting. My expectation is that the Australian bu siness should be very close to profitable while the US business will make a loss due to the starting costs.

The reason for the raising was primarily cash flow and buying the UK business.
Negative cash flow normally occurs in startups till the expansion slows.

 

[luutzu]

I think we will just have to disagree and see how it pans out. The more people pay on time the more they make. Chasing money is not profitable.The next set of results will be interesting. My expectation is that the Australian bu siness should be very close to profitable while the US business will make a loss due to the starting costs.

The reason for the raising was primarily cash flow and buying the UK business.
Negative cash flow normally occurs in startups till the expansion slows.

Not that I need to ask, but please don't listen to me. I just raise certain issues I have with the company and its business.

Best use of what I said is to take a look and see if it makes sense of course.

 

[luutzu]

No worries. One other thing. The 1.5% is how many don't pay, not revenue. So no class action there.

They got that 1.5% by taking a 1.5% provision [estimate? shouldn't it be the actual?]... anyway, they took that provision of some $32M for default, divide it over the $2.2B in "underlying sales" to give the 1.5% "default rate".

When I first read that, I thought that's not too bad. Default at 1.5% is alright.

But on closer look at the actual revenue APT receive from all that "underlying sales"... its revenue is about $142M for FY18.

Using the same $32M provision for default, it's about 22.5% default.

Using the actual reported default/written down bad debt of $22.7M on the same $142 revenue... that's 16% default.

Maybe it's just me, but I find it misleading to say default is only 1.5%, the lowest among those other credit provider etc.... when it fact, when compared to the actual revenue the company is expected to receive, default is from 16 to 22%.

So maybe their 1.5% default is technically correct once you read the fine print... it's quite deceptive.

I mean, if you run a business and 16 to 22% of your your expected revenue is highly unlikely to ever hit your bank account... that's not 1.5% default, no worries kinda talk.

 

[Knobby22]

They got that 1.5% by taking a 1.5% provision [estimate? shouldn't it be the actual?]... anyway, they took that provision of some $32M for default, divide it over the $2.2B in "underlying sales" to give the 1.5% "default rate".

When I first read that, I thought that's not too bad. Default at 1.5% is alright.

But on closer look at the actual revenue APT receive from all that "underlying sales"... its revenue is about $142M for FY18.

Using the same $32M provision for default, it's about 22.5% default.

Using the actual reported default/written down bad debt of $22.7M on the same $142 revenue... that's 16% default.

Maybe it's just me, but I find it misleading to say default is only 1.5%, the lowest among those other credit provider etc.... when it fact, when compared to the actual revenue the company is expected to receive, default is from 16 to 22%.

So maybe their 1.5% default is technically correct once you read the fine print... it's quite deceptive.

I mean, if you run a business and 16 to 22% of your your expected revenue is highly unlikely to ever hit your bank account... that's not 1.5% default, no worries kinda talk.

I deleted my comment previously because I thought I misinterpreted your comment and you were referring to something else.

They are pretty clear about this. 1.5% default rate, they are aiming long term for 0.5% default rate. As they limit the initial purchase to a low figure and also get initial payment of 1/4, the losses are limited but obviously it takes a lot of sales at 4% to make up for one 75% loss.

Banks are the same. A few bad loans greatly effect profits however they are lending far larger amounts at less margin.

A rate is not a revenue. The revenue loss is far greater than 1.5% as explained. As the default rate drops (as is happening) profits increase.

 

[luutzu]

I deleted my comment previously because I thought I misinterpreted your comment and you were referring to something else.

They are pretty clear about this. 1.5% default rate, they are aiming long term for 0.5% default rate. As they limit the initial purchase to a low figure and also get initial payment of 1/4, the losses are limited but obviously it takes a lot of sales at 4% to make up for one 75% loss.

Banks are the same. A few bad loans greatly effect profits however they are lending far larger amounts at less margin.

A rate is not a revenue. The revenue loss is far greater than 1.5% as explained. As the default rate drops (as is happening) profits increase.

So the default provision they quoted... is that just a provision or the actual default where they wrote off the debt?

I used the figured they quoted and it looks like it's just a 1.5% provision on the total "underlying sales". 1.4% to 1.49% for the two years from memory.

Issue I have is that if they're simply putting the fixed provision aside, why are they quoting it as if it's the actual default?

Defaults, judging by the Fy17 and FY18 results, weren't really dropping. They grew at a higher rate than the revenue or the "sales" grew.

BUt it could just be me not getting this lending business.

I'm looking at Monadelphous and their growth/expansion approach is very different.

 

[So_Cynical]

It took Amazon 14 years to turn a profit.
It took Uber 9 years to turn a profit.
It took Airbnb 8 years to turn a profit.
It took Tesla 15 years to turn a profit.
It took Facebook 5 years to turn a profit.

Its all true, at the start nothing is actually making money.

 

[galumay]

It all depend's on what the market values the business and what people are prepared to pay for it. It is very normal for companies to be loss making during hyper-growth phase and to be valued so highly.

It took Amazon 14 years to turn a profit.
It took Uber 9 years to turn a profit.
It took Airbnb 8 years to turn a profit.
It took Tesla 15 years to turn a profit.
It took Facebook 5 years to turn a profit.

The story goes on.... All these companies had crazy high valuations and some of these companies were losing billions of dollars annually.

While that is true for those few companies, and even amongst those 6 you could easily pick a number of them that will likely not turn out to be profitable in the long term, there are simply thousands of businesses which had similar narratives and not only never made a profit, but completely disappeared.

It pays to remember the effect of survivorship bias when you are looking at high growth tech businesses. Most of them end up failing.

I dont care because I have no interest in APT as a business, I dont see it as being investible. I am interested in the narratives people create to support their emotional attachments to certain businesses and I use that to try to learn more about myself.

I wouldn't totally dismiss the ethical arguments against APT, you might not share the view, but regulators will continue to watch closely and there will be many investors who avoid for ethical reasons.

I also think its naive to dismiss the view that its a speculative business at this stage, until its consistently cash flow positive and its earnings are a consistent and worthwhile return on invested capital I think it will be considered by many to be speculative. At this stage of its development the intrinsic value would be multiples less than the current share price, which sort of confirms that the current price is purely speculative based on unknown, future returns that buyers hope will be much, much higher than currently.

All of the planets may well line up and buyers at today's price may see great returns on their capital, I certainly hope so for your sake and the other holders here. I would simply encourage you not to dismiss out of hand the concerns other investors have about the business.

 

[Knobby22]

I find the ethical argument strange.
Users avoid the credit card traps and payday loans companies. No one should be buying the banks as their behavior in respect to credit cards (ignoring all the other things) has been very poor e.g. 24% interest rates.

It amuses me the banks are sponsoring groups to attack Afterpay and directly requesting the Morrison Government to destroy the Afterpay model as it is hurting their profits.

I first got involved when my nieces started using it. They don't have credit cards as they don't want debt traps.

Afterpay is a credit card disruptor. It is a way of buying clothes, dentist etc. without paying interest with an agreed payment plan. What is wrong with that?
It is effectively back to the days of layby except automated and as millenials expect, get the goods/service now.