The Battle for Afterpay’s Past, Present and Future

Afterpay’s past: the makings of a billion dollar darling

Afterpay's buy now pay later platform (the Afterpay System) was originally developed by Touchcorp during the early stages of 2015. The trial of that system – which would come to be used by close to 10 million customers across the globe – was initially tested through just a handful of merchant websites.

At the time, Afterpay’s technology platform was made up of the Transaction Integrity Engine and the Afterpay Operation Platform. The first of those systems was focused on conducting fraud checks and repayment assessments, while the latter platform allowed 'retail merchants to integrate, manage and monitor the way Afterpay is performing on their websites and for end-customers to monitor and manage their Afterpay transactions and accounts.'

With that technology platform established, and after receiving $8 million in equity funding during the early parts of 2015, the company in 2016 would reveal its plans to go public. Here, Afterpay was endeavouring to raise $25 million in fresh capital and issue 25 million new shares at an issue price of just $1 per share.

Upon listing, Afterpay noted that there would be a total of 165 million shares on issue, against an implied market capitalisation of $165 million.

Much of what has made investors flock to Afterpay in recent times was already apparent during its IPO. That is, Afterpay was not only growing quickly back then, but it was also demonstrating the power of its sticky, user-centric product design. In FY15, Afterpay reported underlying merchant sales of $0.6 million, against an average transaction value of $127. By the first-half of FY16 however, those figures had risen exponentially, with underlying merchant sales hitting $6.5 million, against an average transaction value of $151 per customer.

Ultimately, growing average transaction values as well as repeat usage statistics would form a key component of the bull thesis’ that would wash over the market in the coming years.

The Touchcorp merger

It wasn’t until 2017 that Afterpay would trade under the ticker APT, following a merger with its key technology provider and developer Touchcorp.

Indeed, it was Touchcorp – then a separately publicly listed company – which initially built the Afterpay system and continued to be develop and maintain it at the time. In fact, as part of the IPO prospectus, Afterpay even flagged 'Reliance on arrangements with Touchcorp Limited' as second in a summary table of key risks.

Bad debts were listed third. Loss of key merchants first.

The Afterpay-Touchcorp merger was announced in March and completed in June 2017, with the combined group renamed to Afterpay Touch Group Limited, trading under the now iconic ticker APT.

‘Clear synergies exist in relation to platform development and systems which will increase our pace of innovation and speed to market,’ said Afterpay’s Anthony Eisen at the time.

On 29 June, 2017 a day after the merger became legally effective, Afterpay, now trading under the ticker APT, opened at $2.70 per share.

Besides the merger, 2017 provided to be an instrumental year for the company, with APT sowing the seeds for the rapid growth it would experience over the next three fiscal periods.

For the full-year of FY17, APT posted revenues of $22.9 million, representing a staggering increase of 1,535%, on a year-over-year basis. The company's losses also continued to grow – a feat not uncommon for companies like Afterpay and their world-spanning ambitions. Here APT posted a net loss after tax attributable to shareholders of -$9.6 million, a figure itself up 167%. That loss was driven by merger related costs, the company said at the time.

Another point – which would also become a cornerstone of the Afterpay bull thesis was the prospect of international expansion, something which at that point had been teased since the company’s IPO. Here management said:

‘International expansion is a clear opportunity for the Afterpay product. This stems from the applicability of Afterpay’s product to other retail markets and the ability to develop its transaction integrity capabilities in new geographies.’

Afterpay’s present: the 2,397% run-up

Jumping forward to the present, Afterpay finished Friday’s 18 July session, at $67.37 per share, on implied market capitalisation of $18.75 billion.

At this point the international expansion that Afterpay once promised was now well underway, with plans to move into further markets seemingly growing as part of every trading update; and the short sellers that contended the stock was overvalued or that competitors would soon be eating Afterpay’s lunch, as it were, also appeared long gone.

Key FY20 metrics at a glance

Looking at the growth of the underlying business, as part of Afterpay's most recent trading update, the company revealed that underlying merchant sales for FY20 were expected to come in at $11.1 billion – up a staggering 112%, on a year-over-year basis. Elsewhere, Afterpay said it expects its full-year earnings (EBITDA) to come in at between $20 to $25 million.

The company also announced and subsequently completed a $650 million cap raise as part of a further growth push; while Afterpay’s co-founders, Anthony Eisen and Nicholas Molnar successfully sold down their stakes in the company – in a deal valued at ~$250 million.

A $150 million share purchase plan was also revealed, the details of which were released to the company’s adoring retail-investor base on 15 July.

The above figures, though by themselves impressive, are more so when framed against Afterpay’s still-short history, where the company recorded just $0.6 million in underlying merchant sales some five years earlier in FY15.

In line with the company’s original customer-centric focus, users also continue to flock to the BNPL platform, with global active customers hitting 9.9 million in fiscal 2020, while active merchants have surpassed the 50 thousand mark.

Reflecting on the resiliency of the company’s business model, Afterpay's CEO, Anthony Eisen said in a statement to the ASX, as part of the recent trading update:

'The flexibility in our business model allowed us to manage risk when we needed to, but also take advantage of positive customer sentiment and behaviours. Our ongoing investment in growing our retailer and customer bases, and global expansion objectives, will ensure we continue to deliver long term benefits to our shareholders.'

In spite of that growthy update, many commentators continue to scrutinise Afterpay’s valuation. Indeed, on the company’s expected earnings (EBITDA) and against a market capitalisation of close to $19 billion – the company, though fast-growing – trades on an extreme multiple, even when compared to other fast-growing global tech companies.

Long-term shareholders however likely care very little about the criticisms noted above. For perspective, from the price Afterpay (APT) opened at on 29 June, 2017; to the price it closed at on 17 July – the stock is up a staggering 2,397%.

That return comes out even better when you consider that Afterpay was offering stock at $1 per share as part of its IPO.

How to trade Afterpay: long or short

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Afterpay’s future: analysts remain bullish, mostly

In spite of Afterpay’s heady valuation and recent share price run-up, analysts in general – save for the ever-bearish UBS – remain bullish on the stock, with a number of high profile investment banks recently upping their price targets on the stock.

Overall and heading into APT’S full-year results release, due out in August, the analyst consensus is a bullish one, with the stock commanding an Overweight rating on average, according to MarketWatch.

The average analyst price target on Afterpay currently stands at $68.76 per share – implying scant upside potential at current price levels, also according to MarketWatch.

Looking at some of these views on a more granular level, analysts from Morgan Stanley appear to be some of the most optimistic about Afterpay’s long-term prospects, while the likes of UBS appear the most pessimistic.

Morgan Stanely (MS), reacting to Afterpay’s recent operating performance and capital raise, lifted their rating on the stock to Overweight and slapped a lofty $101 per share price target on APT.

Centrally, Morgan Stanley analysts argued that Afterpay has continued to defy expectations – with Afterpay's credit quality control and diversification efforts away from the fashion segment, particularly impressing MS analysts.

Though the investment bank noted that the company’s ‘valuation seems challenging, we think it is warranted by the global Buy Now Pay Later platform that APT is building.’

Like MS, analysts from Goldman Sachs also revised their outlook on Afterpay in the wake of the $650 million capital raise, lifting their price target to $70.15 per share.

Looking forward, while Goldman concedes that while competition will emerge – ranging from American Express, Commonwealth Bank of Australia and even Shopify – the investment bank ultimately argues that:

‘There are enough conflicting strategic considerations they need to consider that we believe it is highly unlikely they would be able to replicate the same user experience for either consumers or merchants that APT provides.’

As such Goldman analysts conclude that:

‘This will likely limit the success they will be able to generate in terms of frequency of use of their service relative to APT.’

Like Goldman and MS, UBS noted that the company's recent cap raise was a distinct positive: arguing that APT should have little trouble funding its receivables in the short to medium-term. Even so, unlike the other two investment banks, USB retained their Sell rating on the stock, though raised their price target to $27.00 per share from $25.00 per share.

Should Afterpay reach UBS’s GMV FY25 base-case forecast, the investment bank argues that this raising would be ‘insufficient to fund the growth on its own, with further equity, warehouse or other debt funding required. Based on sell-side consensus forecasts, we continue to strongly believe the market is under-appreciating the APT's capital intensity.’

UBS does however note that the market continues to value the company on a significantly different set of metrics to its own analysts – explaining the spread between UBS’s valuation and Afterpay’s last traded price.

The Afterpay share price closed the week ending 17 July at $67.37 per share, down 0.10% for the day, but up 186% for the year.

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