APT - Afterpay Limited

[barney]

APT continues to defy gravity ... +8 bagger since late March Spec stock behaviour.

Fundamentally I still don't understand the strength of the rise. To my eyes it looks like a lot of future profits are already locked into the share price but what do I know. If @bigdog and others are still riding the wave, I'd suggest it's your shout

 

[Dona Ferentes]

Trading Update, Capital Raising (Insto $650mill + SPP of $150mill) and Co-founder sell down

Hmmm.

A lot to digest

Underlying sales of $11.1b in FY20, more than doubling the prior corresponding period (up 112%).
● Underlying sales in Q4 FY20 was $3.8b, 127% above Q4 FY19.
● Q4 FY20 sales performance represented the highest quarterly performance ever, reflecting the accelerating shift to e-commerce spending since the impacts of COVID-19 emerged globally.
● Merchant revenue margins for FY20 are expected to be in line with or better than H1 FY20 and FY19.
● Net Transaction Loss (NTL) for FY20is expected to be up to 55 basis points. ANZ NTL has remained at historically low levels and NTL within the US and UK regions has improved in 2H FY20 compared to 1H FY20 as a result of improving risk performance and historically high payment recovery rates.
● Net Transaction Margin (NTM) for FY20 is expected to be approximately 2%, underpinning a pathway to longer term profitability for the overall business.

 

[barney]

and Co-founder sell down.

Mr. Eisen and Mr. Molnar cashing in 10% of their collective chips. That's a lazy $125 million each

That means they still own 90% of their Stock.

At today's price of $68 per share they still own over $1.2 billion worth of Stock ... each!

I'm not jealous ..... well maybe a little .... ok, a lot

 

[Dona Ferentes]

according to someone not enamoured with the story

 

[galumay]

Insiders selling, capital raising, nothing to see here. Someone else pointed out that this is the business model, makes a loss on customers, profits from shareholders, redistributes wealth created by shareholders to founders.

@Dona Ferentes we don't use outdated metrics like P/E for stocks, the best formula to use is the Stonk Ratio, (Capitalisation/Number of Shares Outstanding)/Share Price=Stonk Ratio (SR) Ideally SR should be about 1.0 if you are looking to buy.

 

[Klogg]

Insiders selling, capital raising, nothing to see here. Someone else pointed out that this is the business model, makes a loss on customers, profits from shareholders, redistributes wealth created by shareholders to founders.

@Dona Ferentes we don't use outdated metrics like P/E for stocks, the best formula to use is the Stonk Ratio, (Capitalisation/Number of Shares Outstanding)/Share Price=Stonk Ratio (SR) Ideally SR should be about 1.0 if you are looking to buy.

At first take, this looks ridiculously overpriced, but I'm not sure its that simple.

Consider TAM, credit risk modelling, loss ratios, etc. They're taking huge market share, have the most data on borrowers (so the superior credit risk modelling) and the best onboarding processes.

Australian operations are profitable and growing quickly. They're running a loss because the books is growing and foreign operations need investment. Granted, the numbers are very big (billions), but there's a potential here for every foreign market to be profitable.

Of course I'm not confident enough to own it, but I'm not sure its just 'overpriced'.

 

[galumay]

I don't think the consumer credit market is a sector with any real niches of competitive advantage. The excess margins will be competed away. Australia is only profitable because of default fees and the unsustainable credit charges.

I think it is ridiculously overpriced, the sort of margin, growth and scale assumptions that need to be just about infinite, sustained and exponential to allow a value anywhere near its price is beyond the power of my imagination.

Of course in stonk world thats a contrarian take, as is any consideration of value in a traditional sense, and there is a very real possibility the price will continue to go up for long enough to make buyers at current prices look like they know what they are doing. Not a game i want to play though!

 

[Klogg]

I don't think the consumer credit market is a sector with any real niches of competitive advantage. The excess margins will be competed away. Australia is only profitable because of default fees and the unsustainable credit charges.

I think it is ridiculously overpriced, the sort of margin, growth and scale assumptions that need to be just about infinite, sustained and exponential to allow a value anywhere near its price is beyond the power of my imagination.

Of course in stonk world thats a contrarian take, as is any consideration of value in a traditional sense, and there is a very real possibility the price will continue to go up for long enough to make buyers at current prices look like they know what they are doing. Not a game i want to play though!

I think (that is to say, I don't know for sure) that some stonk valuations are valid in this low rate world. If you can borrow at 2% and buy a company growing from almost no earnings, but at 100% p.a., your investment quickly becomes cheap. In APT's case, Australian operations are profitable, and growing extremely quickly.

The competitive advantage that I think I see is the data-set and analytics behind their customer base. They're the largest BNPL player by far. So, they have the largest data set. Any algorithm used to assess a customer's ability to repay will be superior, as they have the biggest history to draw upon.

Also consider that:
- Customers repay within 2 months
- The retailer pays the 4% upfront (APT passes a lesser amt to the retailer)
- Customers can only buy products worth <$250 initially (in Australia)
- It takes many APT purchases before you can buy anything worth >$1000
- There is an upper total limit too, but I'm not sure what it is

Their demographic is one of high-income, low net wealth. In other words, they make big money and spend it (typically uni educated women in their late 20s/early 30s. I'm not trying to be sexist, just using APT info).
This group has stable employment (they're not contractors), so income is far more predictable than the average citizen.


The biggest risk I see is regulatory, but not anytime soon. The APT outcome is superior for the consumer, relative to credit cards. They pay no interest. Effectively, the retailer pays the interest (4% of purchase price goes to APT)



I think (without enough conviction to buy it myself), that APT will grow their user base to one larger than any other Australian company. Consider the number of potential customers they have across Aus/USA/UK. They have a potential customer base in the tens of millions - larger than the big 4 banks.

They also have superior execution to other BNPLs. Their progress compared to any other BNPL is better on almost any metric.

This has the potential to turn into Google sized returns.

 

[galumay]

I don't agree with your analysis, and its really just reflective of the spin & hype that the sell side has been pumping on this consumer credit company. Thanks for sharing your thoughts in such detail, its always good to have one's views and opinions challenged by constructive and considered responses.

My poor opinion of the business is also coloured by my intense dislike of an unethical business model that makes us all pay more to provide what looks like 'free' credit to a few.

I will leave the discussion here, as I think I have previously sworn off this thread because its not really a productive use of my time given I would never use the lender, nor buy shares in the company!

 

[qldfrog]

I don't agree with your analysis, and its really just reflective of the spin & hype that the sell side has been pumping on this consumer credit company. Thanks for sharing your thoughts in such detail, its always good to have one's views and opinions challenged by constructive and considered responses.

My poor opinion of the business is also coloured by my intense dislike of an unethical business model that makes us all pay more to provide what looks like 'free' credit to a few.

I will leave the discussion here, as I think I have previously sworn off this thread because its not really a productive use of my time given I would never use the lender, nor buy shares in the company!

Understand, difference between investor and trader.got a few apt via one system

 

[Knobby22]

I note the owners are taking some profits which is understandable but all suggests that the shares may be fully priced. I think the model is good, but I don't know if the price adequately takes into account risks.

 

[qldfrog]

I note the owners are taking some profits which is understandable but all suggests that the shares may be fully priced. I think the model is good, but I don't know if the price adequately takes into account risks.

As you know with market darling, this is thrown out of the windows.could still double triple the Fed is the limit...;-)

 

[Klogg]

I don't agree with your analysis, and its really just reflective of the spin & hype that the sell side has been pumping on this consumer credit company. Thanks for sharing your thoughts in such detail, its always good to have one's views and opinions challenged by constructive and considered responses.

My poor opinion of the business is also coloured by my intense dislike of an unethical business model that makes us all pay more to provide what looks like 'free' credit to a few.

I will leave the discussion here, as I think I have previously sworn off this thread because its not really a productive use of my time given I would never use the lender, nor buy shares in the company!

More than fair.

Even though I'm making the bull case, the truth is I've put this in the "I Don't Know" basket, as I don't own it.

And you're right - once we've categorised it according to our knowledge/view, we should move on.

Good chat though.

 

[Dona Ferentes]

More than fair.

Even though I'm making the bull case, the truth is I've put this in the "I Don't Know" basket, as I don't own it.

It is an interesting sector, BNPL . It has emerged so suddenly through a convergence of circumstances;
- Covid has focused things,
- Move away from cash. Cashless is the NEW NORMAL
- digitisation and smart phone apps have allowed it
- the uptake by younger generations
- reaction against credit charges (much better pass 4% to merchant than cop 20% yourself)

Whether it will achieve scale remains to be seen. My hesitation has been that rational people will only spend a certain amount on what can only be thought of as unnecessary items, impulse buying. For that I think galumay has a point about it being unethical, preying on the weakness of consumers (mindless or not). It has always been in the back of my mind the trajectory of growth could not be sustainable. To date, I have got that wrong. Also bringing forward consumption doesn't really achieve anything.

Plus I would have thought the incumbents would have found a way to fight back or at least deny the new players the space to grow. That is a failure.

Now the institutions are on board, the dynamic of "research" and the building of portfolios and index construction gives me great cause to worry about too much upside. If it was a hard one to buy earlier, it can be thought of as being even more fraught now, with new players and new agendas

My only takeout is that if I see AfterPay on offer, I have a duty to request a 5% discount (at the very least) because otherwise I am subsidising someone else's frivolity.

 

[sptrawler]

Basically the Banks were hammered for supposedly lending money to those who can't afford it, now we have an app with minimal checks, that allows people to buy something they may not be able to afford. Weird World IMO.

 

[Klogg]

It is an interesting sector, BNPL . It has emerged so suddenly through a convergence of circumstances;
- Covid has focused things,
- Move away from cash. Cashless is the NEW NORMAL
- digitisation and smart phone apps have allowed it
- the uptake by younger generations
- reaction against credit charges (much better pass 4% to merchant than cop 20% yourself)

Whether it will achieve scale remains to be seen. My hesitation has been that rational people will only spend a certain amount on what can only be thought of as unnecessary items, impulse buying. For that I think galumay has a point about it being unethical, preying on the weakness of consumers (mindless or not). It has always been in the back of my mind the trajectory of growth could not be sustainable. To date, I have got that wrong. Also bringing forward consumption doesn't really achieve anything.

Plus I would have thought the incumbents would have found a way to fight back or at least deny the new players the space to grow. That is a failure.

Now the institutions are on board, the dynamic of "research" and the building of portfolios and index construction gives me great cause to worry about too much upside. If it was a hard one to buy earlier, it can be thought of as being even more fraught now, with new players and new agendas

My only takeout is that if I see AfterPay on offer, I have a duty to request a 5% discount (at the very least) because otherwise I am subsidising someone else's frivolity.

"My only takeout is that if I see AfterPay on offer, I have a duty to request a 5% discount (at the very least) because otherwise I am subsidising someone else's frivolity."

Technically, it's 4% minus the cost of electronic payment (if using a debit or credit card).

Either way, you have a point. I am going to try this the next time I'm shopping at a retailer that offers Afterpay

 

[Dona Ferentes]

"My only takeout is that if I see AfterPay on offer, I have a duty to request a 5% discount (at the very least) because otherwise I am subsidising someone else's frivolity."

Technically, it's 4% minus the cost of electronic payment (if using a debit or credit card).

Either way, you have a point. I am going to try this the next time I'm shopping at a retailer that offers Afterpay

Merchant fees vary, depending on size of retailer, and was aware of it being 4%. I have a duty to myself to get best price

 

[Dona Ferentes]

Biggest game in town. The suits are onto this one:

UBS has a price target of $27.
Morgan Stanley price target is $36.
Morgans has a $68.58 target price.
Macquarie has a price target of $70.
Bell Potter has a $81.25 price target.

I think Mr Gumnut and his well-honed dart needs a throw.

 

[barney]

Biggest game in town. The suits are onto this one:
UBS has a price target of $27.
Morgan Stanley price target is $36.
Morgans has a $68.58 target price.
Macquarie has a price target of $70.
Bell Potter has a $81.25 price target.

I think Bell Potter have it close ... The "Suits" will need to offload their Cap Raise shares ($66) for at least 20% to the unwary punters

 

[Knobby22]

The very reason Afterpay is successful is the rapaciousness of the credit card with its methods of charging fees to the merchant as well as extract ridiculous interest rates from the consumer.
Young consumers are weary of them as they are aware of some of their cohort falling into the trap and so don't want to have credit cards.

Afterpay essentially acts as a modern update of the old method where you buy clothing and pay it off in small payments over a few pays (laybuy).
The consumer cannot run up a lot of debt, the limits are so low.

My nieces use it so they don't get into debt.

So I disagree strongly that the company is unethical. It is far more ethical than Visa/Mastercard and companies such as Zip, Latitude and even Credit Corp with its lending product.

Also one of the reasons Afterpay is worth a lot is not its business but its access to millions of young consumers who can be difficult to reach. Imagine how much the database is worth!.