Wow -- Square to acquire Afterpay in a deal worth $39b. And Afterpay also announces an 88% lift in FY21 revenue (constant currency)

Very early thoughts:

• roughly $134/share at current exchange rates
• Shares based payment (APT shareholders to get Square shares NYSE:SQ)
• Equates to a 42x sales multiple (!!!)

A mammoth deal. Will take some time to digest all this, but congrats to shareholders.

Competition is a fact of life for almost every company, and in and of itself not a reason to be bearish on a stock.

That being said, when you have two of the world's biggest tech players moving in on your turf, as well as the major banks, it does perhaps warrant some restraint for those forecasting blistering and unfettered growth. 

PayPay has launched an offering and Apple is rumoured to be working on a product too. These guys have deep pockets, awesome development resources, incredible reach, powerful brands and are likely happy to accept lower margins.

I'm the first to admit that Afterpay deserves lots of credit and has the makings of a wonderful company that will endure for a long time. My issue is the valuation which suggests incredible and unbroken growth for a long, long time. This was the thrust of my bear case earlier this year when I chatted with the lads from Equity Mates (see here).

I also have concerns over customer stickiness -- is it really that hard for consumers to switch to another product? Will retailers not offer anything that helps them boost sales? I doubt it.

I wish I bought AfterPay back when it first entered the Strawman Index (hindsight is wonderful!), but at present it's just too rich for me. There's just no margin of safety at the current price.

AfterPay has posted yet another strong update, with underlying sales up 104% in the 3rd quarter ending March 31. Excluding FX impacts, it was a 123% improvement, with a 75% lift in active customers.

All regions saw good growth, but the UK and the US were the real standouts with underlying sales up 277% and 211%, respectively. North America is now the largest segment, recording more than $1b in underlying sales in March alone.

Another interesting point was that the board is considering a US listing. That would certainly provide more access to capital, although whether that would be good for the share price is hard to know -- the ASX tends to grant much higher multiples for tech stocks than the US currently does. Anyway, it may not happen and there's no timeline associated with this.

There's a lot more detail on the ASX announcement, which you can read here.

Overall, it's hard not to be impressed with AfterPay's success. Their growth has been truly spectacular. 

That being said, I remain of the view that the share price already accounts for ongoing significant and enduring growth, and that the risk/reward proposition isn't great at present.

Add to this the potential for increasing competition and regulation, and over time i expect gross margins to narrow.

Too hot for me.

Afterpay's CFO Luke Bortoli is stepping down after about three years in the job.

He will be replaced by Rebecca Lowde, who was formerly the CEO of Salmat and the CFO of Bravura. The handover will formerly commence on October 6.

Based on the announcement, it appears an amicable decision and there's probably not much to read into here (although would appreciate any scuttlebut if anyone has any).

You can read the ASX announcement here

A brain dump on AfterPay:

https://twitter.com/tickertvau/status/1282538917267337217

I think there's a lot to like about the business, but find the price very difficult to take. 

At the current price, it's a bet on whether bnpl legitimately becomes a lasting global phenomenon, and that AfterPay can hold a major share of it. 

AfterPay is taking advantage of its, er, "robust" share price to raise up to $800m.

Shareholders can subscribe for an additional $20k of new shares at $61.75 each, a ~9% discount to the last traded price (but a 100% premium to where they were at the start of the year).

Frankly, i think it's a smart move and a cheap way to access extra capital that can (hopefully) accelerate growth.

At the same time, founders Anthony Eisen and Nicholas Molnar will be selling ~2m shares each, or around 10% of their holdings. Again, hard to fault them given the current price (but perhaps somewhat telling of their estimation of value).

Further details can be found here

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.

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.

Bull case on Livewire

Click here

AfterPay shares seem to have a rocket under them.

Certainly a lot of growth and is forming a potent network effect. Around 10% of all physical online retail is now processed through the platform. The US is getting some incredible traction and the potential there and elsewhere looks promising. Still a long way to run.

On balance, I'm actually bullish on the business. This could easily be generating $1b in sales withing the next few years. (compared with $142m in FY18)

BUT -- there are some things to be mindful of. Especially with the market seemingly pricing in only the upside potential.

First, although AfterPay has navigated the regulatory environment very well, things could always change, and fast. Perhaps not highly likely, but certainly could be high impact.

We also don't know how well the business will hold up if more people default on payments (say there is a meaningful retail slowdown and/or recession). Algorithms measure on past payment history, but things tend to unwind very fast -- problems often don't become apparant with customer balance sheets until it's too late.

The market tends to (in my view) unreasonably focus on EBITDA measures -- why would you exclude amortisation when all development spend is capitalised? Why ignore Interest expenses for a financing business?

Anyway, definitely an exciting business with loads of potential. Just wanting to provide some balance to the debate. Easy to overpay for even wonderful businesses.

Afterpay has extended it's gains so far in 2019 to over 34%, with shares soaring on the back of a very positive update.

Key highlights include:

• Platform has processed over $260m in payments in the US in the first half, acquiring 650,000 new customers. The US expansion is going better than anyone could have reasonably hoped for. Lot's of potential remains here, especially as in-store penetration increases.
• US funding close to being secured
• 90% of revenue comes from returning customers
• First have sales value up 140% to $2.2b
• December was the largest ever month on record
• Late fees now represent <20% of income (down from 25% in FY18)
• Although early adoption was very much driven by so-called millenials (1 in 4 of this demograohic have used the platform), the average age is now 33 and rising. That is, it is penetrating into other demographic segments.

Shares may appear expensive on any traditional metric, but the pace of growth is phenomenal, and there remains a huge market opportunity. I have increased my valuation to reflect this (see my forecasts page).

Read full announcement here