A compelling bear case from Lyall Taylor.
See their blog article here
In short, APT is a more costly solution to a solved problem that is cheaper and more convenient.
It makes its money on hidden merchant fees that are unlikely to be sustained at scale, or in the face of regulatory change.
Is it time to buy some of the battered darlings, Afterpay and Lovisa? Or is the knife still failling? This graph comparing to '87 looks eerily like there's another 15 per cent and several months to go.
Revenue - $212.2 M up 105% on pcp
Net transaction Margin - $102 M (or 48% of revenue) up 118% on pcp
Impairment expense - 1.0% down from 1.2% on pcp
Net transaction loss - 0.5% down 0.1 % on pcp
Operating loss - $31.5 M or -14% of revenue.
Operating expenses - $80.8M - 317% increase on pcp - Primarily due to a 500% increase in marketing spend ($32M), which is now around 15% of revenue.
Merchant income margin - 3.8% up 0.1% on pcp
operating cashflow - -$33.8 (-15% of revenue)
Revenue growth - regional breakdown
ANZ ($3.1B transactions)- 55% growth on PCP - 23% active customer growth, showing expanding revenue per customer as the platform matures. 98% customer retention for monthly users - this is despite being only able to use Afterpay when the accoutn is fully paid month to month.
US ($1.4B transactions)- 445% growth on PCP!. Customer net losses and revenue per customer is tracking the ANZ experience, demonstrating the model is translating to the US - so far. There are now more US customers than ANZ customers.
UK ($0.2B transactions) - operational for 6 months. At the end of December, $0.65B transaction run rate achieved.
Late fees, as a percentage of underlying sales continues to fall, down to 0.7% of sales. This is important, as APT needs to demonstrate it promotes responsible use.
22900 customers signed up PER DAY in November / December. Thar is more than 1 million customers in 2 months!
Expansion into Canada this year.
Customer outstanding balances are $211 compared to credit cards at $3380.
Current revenue run rate is $480 Million ($11 billion transactions)! However, APT only has sufficient funding capacity for $15 BN in transaction volume. I think APT will need more capital / funding to meet the opportunity.
Currently, existing US & UK merchants and pipeline merchants comprise a $30 BN transaction pipeline TAM - WITHOUT ANY FURTHER MERCHANTS ACQUISITION.
PEOPLE - Afterpay have recruited some executives to boost management capability -
GLOBAL CHIEF PRODUCT OFFICER
DAVID KATZ (EX FANATICS, GROUPON)
GLOBAL CHIEF MARKETING OFFICER
GEOFF SEELEY (EX AIRBNB)
ANZ SALES DIRECTOR
KATRINA KONSTAS (EX AMEX)
VP PRODUCT DESIGN
SCOTT POLCHLEB (EX WEWORK)
US HEAD OF FINANCE
LAURA NADLER (EX VISA)
Partnerships - VISA in the US, and Mastercard in ANZ.
Australian BNPL code of Practice - APT support code of practice, with it being resolved later this year.
Reserve Bank Issues Paper on surcharging - APT oppose surcharging, but this is a risk to the Australian business.
AUSTRAC considering auditors (positive) report - APT implementing recommendations. Low risk of adverse outcomes.
Targeting to exceed revenue run rate of $800 M by June 2022.
In store transactions is 25% of underlying sales in ANZ, and it is anticipated this will increase over time.
They have achieved their online target in the US of 5% of the millennial market, and are now turning their attention to bricks and mortar retail in the US, using their millenial customers to drive this channel.
Marketing spend - marketing is done in partnership with merchants, with increased spending anticipated with new US, UK, and Canadian merchants.
Presentation link: https://edge.media-server.com/mmc/p/24q3daze
17-Feb-2020: The link I'm about to give you is to a podcast of an interview / discussion between Michael Frazis (of Frazis Capital Partners) and Claude Walker (of EthicalEquities and "a rich life", also formerly the portfolio manager at Motley Fool Australia's "Hidden Gems" service) and they discuss APT from around the 14:30 mark through to around the 24:30 mark: https://www.fraziscapitalpartners.com/podcast/episode/201bb0b7/episode-22-aussie-growth-stocks-for-the-next-decade-mike-and-claude-talk-polynovo-avita-audinate-pro-medicus-and-afterpay
Thanks to @Kaboom who has already posted this link (you can find it not too far below this in the newsfeed) in relation to Avita Medical (AVH) - who are discussed right after APT (from around the 24:30 mark).
Claude has never been onboard the APT runaway train (I'm in the same boat, or is that one-too-many mixed basic transport analogies?) but Michael Frazis certainly has been - since the beginning I believe. Anyway, for those who are interested in Afterpay, it's probably worth listening to.
P.S. Michael and Claude aren't brokers - and they don't work for broking firms, but they are certainly stock analysts, hence my choice of titles for this straw.
This is the link to the article I was talking about below
Defo worth a read for those holding this stock
Regulatory Update – California, US
"The Company confirms that an Afterpay subsidiary applied for a California finance lender’s license through the DBO in 2019. The DBO issued the license on 12 November 2019 and the license is valid. Afterpay applied for the license to facilitate its potential future expansion into other service offerings in the US that align with the Company’s business model."
Woah now I believe they have a moat, pipping out Sezzle for the lender license. Afterpay can now take market share away from Sezzle in US. Massive news for the company.
01-May-2020 (7:23pm): Afterpay welcomes Tencent as a substantial holder
Media Release, 1 May 2020.
AFTERPAY WELCOMES TENCENT AS A SUBSTANTIAL SHAREHOLDER
Afterpay Limited (Afterpay) is pleased to welcome Tencent Holdings Limited (Tencent, 00700.HK) as a substantial shareholder of Afterpay, confirmed by the lodgement of a notice of initial substantial holder on the Australian Securities Exchange on 1 May 2020.
Tencent is a listed company on the Hong Kong Stock Exchange. The company provides Internet valueadded services, including digital entertainment, online advertising, and FinTech and cloud services to users. Its communications platforms include Weixin, WeChat and QQ. Its Weixin Pay service is the leading mobile payments platform in China, facilitating an average of over 1 billion commercial transactions per day.
Anthony Eisen and Nick Molnar, Co-founders of Afterpay commented:
“We feel very privileged to welcome Tencent as a substantial shareholder in our business. Being able to attract a strategic investor of this calibre is extremely rewarding and is a testament to our team and the strength of our differentiated business model.
“Tencent’s investment provides us with the opportunity to learn from one of the world’s most successful digital platform businesses. To be able to tap into Tencent’s vast experience and network is valuable, as is the potential to collaborate in areas such as technology, geographic expansion and future payment options on the Afterpay platform.
“We remain focused on delivering value for our new and existing shareholders over the long term.”
James Mitchell, Chief Strategy Officer of Tencent, commented:
“We are pleased to become investors in Afterpay. Inside China we operate the leading digital payment service and a rapidly growing FinTech platform, and outside China we have actively invested in pioneering FinTech companies, providing us with unique insights into emerging FinTech services. Afterpay’s approach stands out to us not just for its attractive business model characteristics, but also because its service aligns so well with consumer trends we see developing globally in terms of Afterpay’s customer centric, interest free approach as well as its integrated retail presence and ability to add significant value for its merchant base. We look forward to a deep and long-term business partnership between Tencent and Afterpay.”
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Not one of my stocks but for those interested excellent article on Livewire today where Company is stress tested to 40% bad debt. Sorry don't have link
Afterpay (APT) - Will join the MSCI Australian Index at the close of business Friday (29-May-2020). Australia's second and third largest gold miners (after NCM), Evolution Mining (EVN) and Northern Star Resources (NST) also set to join the MSCI.
That's a link to "The Call" on Friday (22 May 2020) on the Ausbiz Business streaming service, which starts off with their "Stock of the Day", which was APT for this episode. Jun Bei Liu from Tribeca and Adam Dawes from Shaw and Partners are wary of APT at current levels.
I bought about 18 months ago and got my initial investment back and the profit was left as shares. I am happy with sitting on them as I do not need the money and the only investment I have is in the 2k options offer.
Afterpay: What the market is missing
Afterpay's share price has had the most remarkable year as Shane's chart testifies, and no doubt caused a few skipped heartbeats as its share price fell 75% in a single month, wiping around $7 billion off its market cap. Yet, in the 2 months that followed, the stock nearly quintupled recovering all of its ground and more.
As it has been for each of the last few years, Afterpay is the outlier in the list of the most tipped stocks. With an incredible +42% performance year-to-date, whilst the market is still down close to 20%, this one stock is the main reason the average performance of the 'most tipped stocks' looks so good.
Click on the link above, or here, to get Shane's full view on the stock. While many are clearly bullish on this stock, a few things he said the market is still under-appreciating about it are that:
"Firstly, the market continues to under-appreciate the increase in existing customer usage of the service over time, and what this will do to underlying sales growth and the associated benefits to operating leverage. The market also under-appreciates the implications of APT’s targeting of small size transactions of on average $150. It has implications for regulatory risk as mentioned above, but it also has implications for competition as a number of buy-now-pay-later players have commenced operations but are tending to target higher market segments".
Incidentally, if you want to be notified next time someone publishes commentary about Afterpay on Livewire, scroll to the bottom of this wire and click on the stock code/s of interest [click on the link above first though to get to the wire].
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Afterpay is experiencing eye-watering growth, and has had incredible early success in US. It's move into the UK also holds great potential.
The business has a solid first mover advantage, and enjoys very potent network effects and a great positive feedback loop (more users = more retailers = more users etc etc).
Growth drivers are more users, in more geographies using APT for more services/products. They also have solid pricing power, with retailer commisisons seemingly increasing in recent times.
It is a genuine win-win. Consumers get a zero interest cost payment method, retailers increase sales.
Regulatory risks seem overblown -- there's a lot worse business models out there, and any increased regulation likely to be more negative to competitors (that tend to charge interest).
Credit risk is very real, although small transaction sizes, with debt capped and further transactions suspended seems to mitigate this to some extent. They also seem to show some lending discipline, with 30% of transactions rejected.
We are yet to see how things hold up during a material economic slowdown. A decline in consumer activity and increased defaults could cause a significant drop in earnings (or, should i say, a widening in the loss).
Valuations seem crazy, but typical metrics dont tend to work well for companies experiencing exponential growth and that have a long runway for exapnsion (eg Amazon).
And that's the key point -- to be bullish at current levels ($26 at time of writing), you really do need to see APT become one of the dominat global players in the buy-now, pay-later space.
Even then, this story will take many years to play out, and it will be a volatile ride.
If growth stalls for any reason, the market re-rate will be brutal.
27-Sep-2019: Is Afterpay still a ‘buy’?
In that Livewiremarkets.com "wire" (article), that question is discussed by Dean Fergie, of Cyan Investment Management, Emanuel Datt, of Datt Capital and Michael Frazis, Frazis Capital Partners, and, as Livewire's Patrick Poke explains, "It's all about timeframes".
All three of those fundies have held APT in their portfolios, but do they now? And what is their current view on the future of APT? Click on the link above to find out.
The article starts with this paragraph:
"From a $165m micro-cap, to a $9.2b behemoth in just three and a half years, Afterpay’s rise to stardom has been nothing less than meteoric. For investors in the IPO, the returns could only be described as life-changing, with the share price going up by a multiple of 37 in that time. But success breeds doubters, and the obvious question on many investors’ lips is; does the stock still have room to run?"
APT is also discussed in this Livewire "Buy Hold Sell" segment with Arden Jennings, Co-Portfolio Manager at Ausbil Investment Management, and Robert Miller, Portfolio Manager at NAOS Asset Management, having opposite views on the stock. NAOS have a "sell" on APT and Ausbil still rate APT as a "buy". The transcript of the segment can be read here.