Afterpay: where next following latest US expansion push?

Afterpay (ASX: APT) – a leader in the buy now pay later space – on Thursday announced plans to roll out its pay anywhere functionality across some of North America’s largest and most important merchants. The Afterpay share price rose in response.

Amazon, CVS, Dell, Kroger, Macy's, Nike, Sephora, Target, Victoria's Secret, Walgreens and Yeti all made the list of companies included in this latest US expansion push. That impressive list of large-cap merchants, as Afterpay proudly pointed out, are alone responsible for almost 50% of North America’s annual e-commerce volumes.

Afterpay share price rises

The market responded with bullish optimism to this announcement, with Afterpay opening up 4% at ~$128 per share. By the afternoon session, the stock had broke past the $130 mark, trading up 7.21% by 12:55 pm AEST. Afterpay closed the session at $130.50 per share.

This caps off a sharp turnaround in sentiment for the stock, with Afterpay now up over 40% in the last month, after dipping below $90 per share in May.

Other ASX-listed BNPL stocks also rose during Thursday’s session, with Sezzle (ASX: SZL) and Zip (ASX: Z1P) both up at the time of writing. The broader market, by comparison, finished out the day lower, with the ASX 200 down 24 points at the close.

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A novel approach

Looking at the specifics of the US merchant expansion announcement, it was noted that Afterpay users would only be able to make use of the pay anywhere functionality through the Afterpay app.

Specifically, users would be able to make use of the pay anywhere functionality by navigating to the Afterpay Shop Directory, choosing to shop with one of the merchants listed above, and selecting Afterpay as their preferred payment option at checkout in the app. This payment would be facilitated through a one-time use virtual card, with the relevant payment details automatically populated at the time of checkout. This process, said the company, would offer users a seamless experience.

Given the substantial engagement with Afterpay’s Shop Directory, the move to roll out these enterprise-level merchants across an online only experience makes strategic sense. Indeed, as the company pointed out, the 'vast majority' of Afterpay customers initiate their shopping journey at the Shop Directory level, with the company saying it generates some 31 million leads – on average and on a monthly basis – from its directory.

Shifting trends

To be sure, Afterpay honed in on the increasing shift away from the traditional bricks and mortar shopping experience, focusing rather on e-commerce growth, pointing out that ‘U.S. ecommerce growth nearly tripled in the first three months of 2021 compared to a year ago, as more consumer shopped from the comfort of their home.'

While some have questioned the longevity of these trends in a post-covid world, others, such as Afterpay's Zahir Khoja, argue they have staying power due to the convenience and flexibility they create.

'Over the past year, we all relied on online shopping for the things we needed during the pandemic. But, as we celebrate the re-opening of stores, consumers still want the convenience and flexibility of buying with the click of a mouse as part of their 'new normal'."

Mr Khoja, who is the General Manager of Afterpay North America went on to say:

'We are thrilled to continue to support our customers by allowing them to shop every day at their favourite brands with Afterpay for things they need and want in their lives.'

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The RBC view

Off the back of this announcement, analysts from RBC responded positively, arguing that this latest, app-focused expansion push has a number of key potential benefits, including: potentially boosting customer frequency and user engagement in North America.

‘We think this functionality will be materially incremental to volume and frequency over time in the US, generate revenue yields likely in excess of integrated merchant fees, and unlike some competitors will not include any additional customer fees.’

‘We also see this as a move from APT to leverage its material BNPL network to evolve into a broader commerce and marketing platform that will leverage APT’s data on customers to drive more relevant, personalized lead volume and data to merchants,’ RBC analysts noted.

The investment bank has an Overweight rating and $150 price target on Afterpay.

Building on a period of growth

Afterpay hasn’t become a $38 billion company by mistake. Building on successive quarters of phenomenal growth and world-beating ambitions, the company has continued to grab headlines and attract new investors.

Looking back at the company’s most recent Q3 update, Afterpay reported enviable growth on an increasingly global scale, while also highlighting the growing importance of the US market.

Overall, management said group underlying sales more than doubled in the period, with North American underlying sales growth a particular standout, rising 167% year-on-year. Speaking to the company’s global ambitions, Afterpay at the time further noted that North America had become the largest contributor to underlying sales on a group-level and during March alone broke past $1 billion in underlying sales.

Such trends underscore the importance of the US market to the company’s growth agenda – and go a ways to explaining its still (and growing) valuation. Whether this growth can be maintained to a level amenable to the market however, remains another matter entirely.

Afterpay, after all, trades at 56x sales.

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