Australia | Jan 30 2018
Australia’s dominant 'buy now, pay later' success story is leveraging its first-mover advantage to target the US, an ecommerce opportunity worth 20 times the local market.
-Rapid penetration into online sales exerts magnetic 'network effect' on merchants and customers
-Partnership with seasoned tech-focused venture capital firm underpins US strategy
-Analysts tip rise of 20% to 40% in Afterpay shares over the coming year
By Nicki Bourlioufas
Afterpay Touch Group ((APT)) continues to attract investors' attention as a rapidly growing fintech that has established itself as the market leader in 'buy now, receive now, pay later' finance for both online and instore shoppers.
Afterpay recently announced a strategic partnership with experienced tech-focused US venture capital firm Matrix Capital Partners, which will invest in and advise on the Australian company's US expansion plans.
Afterpay IPO-ed in 2016 and in June 2017 merged with another listed fintech, Touchcorp, to form Afterpay Touch Group.
The company’s deferred payment product allows shoppers to make purchases without interest charges, up-front fees or loan application forms. Consumers typically pay off these 'reverse laybuys' in four equal fortnightly instalments.
Afterpay’s revenue comes from merchant fees, which averaged 4.1% in 2016-17, plus late fees levied on users who miss deadlines.
The Touchcorp side of the business provides the Touch System Platform, which the company says offers advantages including fraud protection, regulatory compliance, and data collection and analysis.
Afterpay’s algorithms assess the shopper’s repayment capabilities and risk of fraud automatically and in real time.
The company holds an Australian Credit Licence, even though it is not required to given it does not charge interest or fees and its credit duration is a relatively short 56 days.
The rapid repayment cycle means that every $100 in capital deployed generates about $57 of revenue over the course of 365 days, assuming returns are reinvested.
Underlying total transaction volumes hit $2.2bn in the December quarter of 2017, five times the level of a year before.
End-customers more than tripled over the same period to about 1.5m and merchant numbers grew by 450% to 11,500.
Brokers optimistic on underlying growth trajectory
Afterpay closed at $7.71 on January 30, a nudge up from its January 16 close after the Matrix announcement.
Stockbroking analysts covering the stock remain highly optimistic about prospects, to say the least, tipping a rise of 20% to 40% for the shares over the coming year.
Wilsons' forecast might serve as a broad gauge for the optimism expressed across the board: “2017 was a stellar year for APT. We believe momentum will continue in 2018.”
The broker recently reiterated its Buy recommendation and raised its 2018 target price to $10.41, suggesting 39% in total shareholder return.
Bell Potter also maintained its Buy call, raising its target price to $9.20 from $7.30. Bell factored in some costs from the US expansion, while holding off from including any revenue until the company provides more detail.
Ord Minnett initiated coverage with a Buy recommendation and a target price of $9.50, citing Afterpay’s “high uptake velocity, as the network effect continues to drive more retailers to offer the product, therefore allowing more consumers to use it more frequently.”
Afterpay facilitated 8% to 9% of online sales in Australia in the December quarter. Its service is now offered in 5,000 shopfronts, which contributed 8.5% of the sales mix in December.
Bell Potter notes that although Afterpay does not use a traditional lending model, it “is still exposed to the risk of default or a loss of principle” and the ability of its technology to prevent fraud and recover bad debt is crucial to the company’s viability.
US ecommerce market promises big wins
Having already had a stellar run on the ASX, on January 16 Afterpay announced a partnership with US tech-focused venture capital firm Matrix Capital Partners, which will take a strategic stake in the company and advise on its US expansion.
Matrix General Partner Dana Stalder, who has held senior roles at eBay and Paypal, will join the Afterpay board as an independent non-executive director.
Matrix will invest US$15m in equity, in the form of 2.88m shares at $6.51 per share, with escrow periods of three and seven years. As well, new subsidiary Afterpay US Inc will issue US$100,000 in convertible notes to two funds managed by Matrix. The notes will convert to up to 10% of the future value of the company in excess of US$50m when the conversion period rolls around in 5 to 7 years’ time.
Wilsons quotes FTI Consulting’s estimate that online e-commerce activity in the US was worth US$445bn in 2017, up 12.7% on 2016, adding: “This opportunity appears to be at least 20 times the size of the Australian online retail market.”
Afterpay listed in May 2016 with Touchcorp as a 35% shareholder. The shares rallied 30% within the first week of listing, immediately capturing the attention of investors. The stock has not fallen off the market's radar since.
