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
Last week I attended (remotely) a mini conference held by a VC firm associated with my employer where a number of the startups the VC firm has invested in presented. There was a whole segment dedicated to BNPL, with three companies presenting. Two of them were straigh up Afterpay competitors with focuses on particular industry niches, and the third offered a white label BNPL solution to companies that don't want their customer loyalty erroded by independent BNPL providers. All three had attractive, easy to use functionality for payers and quick integration with merchants.
My reason for sharing this experience is that APT is priced like it has no effective competitors and will become dominant in the North American and European markets. I feel that is overly optimistic as there are clearly a host of well financed fast followers chasing them and trying to capture market share. Not to mention the possibility that large merchants will likely prefer to provide their own BNPL offering via a white label solution rather than fork over 4% to APT. This will reduce APT's growth and squeeze their margin, ultimately leading to lower profitablity and a lower shareprice.
A brain dump on AfterPay:
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.
Latest episode of The Rules of Investing podcast featured Simon Shields, Principal at Monash Investors Limited. He shared some interesting insights on EML and PPE but the comment that resonated with me the most was his answer to the "if the market was to close for 5 years and you had to invest in only 1 company?" question.
He discusses structural shifts through history, one that is taking place right now and how that would give him the confidence to go with Afterpay. At a time when I am feeling the influence of many commentators continuing to say it is extremely overvalued (while I think the oposite based on my research and forecasts) his long term focussed comments, and how he related them to Afterpay's fundamentals was very refreshing and inciteful.
I don't want to quote the podcast, if you are interested go have a listen, it is part of the "3 favorite questions" segment of the podcast from 26:55 onward at the link:
01-Sep-2020: From Marcus Padley's ("MarcusToday") EOD (end-of-day) email:
BNPL stocks woke up to a brave new world, one where a big gorilla is flexing its muscles, as Paypal announced it was entering the market sending the sector into a tail-spin. SZL dropped 14.7%, OPY down 7.2% and Z1P down 12.8%. The behemoth APT dropped 8.0%, leaving the All Tech Index down 2.2%.
By JAMES GERRISH, Market Matters
Last week I sat down with Shaw & Partners Analyst Jono Higgins for an update on the BNPL stocks as we enter a strong period for online retail. I rate Jono highly in this space and his insights are well worth a listen.
The “Buy Now Pay Later” space now enjoys annual turnover of $14bn after just 5-years with around 30% of Australians now using either Z1P and APT but only 5% of Americans are at this point in time, hence the obvious path of growth.
Online shopping has accelerated through the COVID-19 pandemic and we believe it won’t be reversed when a vaccine is eventually found, subsequently we’ve seen 10-years of growth for the BNPL stocks in just 6-months but the cynics will obviously say that’s as good as it gets.
I've summarised some of the key takeaways and presented our views around the sector, or you can watch the recording of our conversation below.
In the next few weeks, we will see much of the sector report for the last quarter, the numbers should be excellent following strong retail sales. Also, to compound the optimism we are now entering the strongest quarter of the year as we all gear up for Christmas, in other words the next few months should be a purple patch for the sector. After the recent aggressive corrections we believe this is an ideal time from a risk reward perspective to be long the sector.
Current cycle tailwinds
1 – A number of large businesses are taking strategic stakes in the Australian BNPL sector such as Tencent’s (700 HK) 5% in APT and Westpac existing stake in Z1P, plus Amazon (AMZN US) own a bunch of warrants that will allow them to buy into the stock in the future. Consolidation is not yet on the table but the likes of Mastercard (MA US) and Visa (V US) can buy say Z1P without raising equity i.e. its probably just a matter of when, not if.
2 – The cost of capital is rapidly falling as the companies show excellent risk profiles for their customers plus of course it helps that central banks are cutting rates and stimulating the global economy.
At this stage we believe it’s not about profits, it’s all about growth as the companies reinvest earnings. In the future we can compare the stocks to PYPL which trades on 22x gross profit but its way too early in our opinion.
Obviously the main question is how much is built into share price of these growth businesses and yet again it brings me back to our view on the market as a whole “buy weakness & sell strength” – remember the sector has been weak of late. We believe there are 3 main areas of risk:
1 – Competition: we saw recently the impact on the local stocks when PayPal (PYPL US) stated its intention to enter the fray but at this stage in our opinion their offering isn’t as attractive as the Australian competition. Undoubtedly competition will increase but as we mentioned earlier if the US takes up this new method of credit like Australia the sectors set to boom leaving plenty on the table for new players. Margins will also fall as competition increases but that may easily not unfold for 2 years, we need to watch the timeline carefully in this rapidly evolving space. However, as the sector slowly matures the winners of BNPL will have plenty of room to diversify into the likes of car & home loans from a large and happy customer base.
2 – Market: we believe the market itself is the largest risk to these high Beta stocks, if fund managers decide to sell off the high growth stocks BNPL will be included, the NASDAQ is the best barometer of growth valuations and at MM we are bullish at least short-term.
NB High Beta stocks usually move in an exaggerated manner both up and down to the index.
3 – Execution: Obviously high growth businesses need to implement their strategy carefully, investors like ourselves must watch this carefully.
Zip Co (Z1P) $6.17
Zip is our favourite major stock in the space, especially as its trading at a 65% discount to APT. The companies currently accumulating a whopping 6,500 new customers daily, I wish MM [Market Matters] was!
MM is bullish Z1P with an initial target 25-30% higher.
Zip (Z1P) Chart [click on the link at the top for the full report including this chart]
Afterpay Ltd (APT) $79.99
APT is the sector heavyweight with a current market cap of almost $23bn. We like the stock around $80 but see a little more upside and value in Z1P.
MM is bullish APT looking for a test of $100.
Afterpay Ltd (APT) Chart [click on the link at the top for the full report including this chart]
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[I do not hold any BNPL stocks, but that's more a function of my personal style and preferences - rather than specific judgements on any of the companies discussed above. It's just not an area I choose to play in myself, for a few different reasons.]
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
14-Nov-2020: From two days ago (12-Nov-2020): https://www.livewiremarkets.com/wires/afterpay-buy-now-pain-later
SIMON MAWHINNEY from Allan Gray Australia (deep value investors) gives a decent Bear Case for APT here:
Afterpay has been a sharemarket darling, with its share price rising almost tenfold over the past two years alone. The price has fallen a little since starting this article, but market consensus remains optimistic. To us, however, the risks seem heavily skewed to the downside. We explore Afterpay’s attractiveness, or lack of it, from a long-term investment perspective below.
Afterpay is a buy-now-pay-later facilitator which allows its users to split the cost of purchases into four equal two-weekly instalments over six weeks (with the first instalment paid at the time of purchase). It does not charge its users interest, caps late fees and pauses accounts when customers miss a payment. Its revenue is derived by charging retailers a percentage of the merchant sales facilitated by Afterpay.
Let’s start with some numbers...
--- Click on the link above to read more ---
[I do not hold APT shares. Allan Gray Australia are Value investors, not Momentum or Growth investors, what's more, they are "deep value" investors, so tend to only invest in companies that are almost universally hated by the vast majority of market participants at the time AG invest in them. As such, Afterpay is exactly the sort of company that Simon Mawhinney from Allan Gray would NOT touch with a 20 foot barge pole, so it's little wonder that he has a bear case ready for APT and is happy to share it. I am highlighting it only because all good bull cases and bear cases are going to include some truths and some undeniable facts, and for those who do hold APT shares, it's good to at least hear a decent bear case, even if you don't ultimately agree with it.]
Afterpay to expand into Europe
Great thesis by Fred Liu of Hayden Capital based in the US. The unit economic analysis on the business and the US market opportunity is very insightful.
BEAR BEAR BEAR
Authorities sniffing around. 1 in 4 cant pay their bills, no relief in sight.
How can this continue.
Every day goes by, their customer economics goes down (competition etc). Regulators sniffing will make people that have multibagged jump and then it's a deep dive. Last one off gets burnt
It looks like they cut job ads through COVID, but have now started advertising for jobs again, at record levels. Suggests that they're not really worried about COVID any more.
* Total income consists of Afterpay income, Pay Now revenue and Other income.
The Group achieved total income of $519.2 million for the year ended 30 June 2020, up 97% on the prior year. Growth in total income was driven by an increase in customer and merchant demand for the Afterpay service across all of the markets in which Afterpay operates including the ANZ, US and UK regions. Total income growth was supported by an increase in the value of customer orders processed through the Afterpay platform (referred to as Underlying Sales) and an increase in the average fee paid by merchants for the use of the Afterpay service (referred to as the merchant margin or Afterpay Income Margin).
The Group delivered earnings before interest, tax, depreciation and amortisation (EBITDA) (excluding significant items) of $44.4 million for the year ended 30 June 2020, up $18.7 million on the prior year. Higher EBITDA (excluding significant items) was driven by an increase in gross profit which more than offset planned increased investment in employment and operating expenses. Investment was directed to scaling Afterpay’s global operations and delivering on the Group’s publicly stated target of exceeding $20 billion of Underlying Sales by the end of FY22.
The Group recorded a statutory loss before and after tax of $26.8 million and $22.9 million, respectively, for the year ended 30 June 2020. Statutory loss before tax includes foreign currency gains, share-based payment expenses, net losses on financial liabilities at fair value, share of loss of associate and one-off items which totalled $20.0 million in the year, which are not included in EBITDA (excluding significant items).
--- click on the links above for more ---
[I do not hold APT shares.]
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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That's Commsec's take on the APT FY20 full year result.
Comforting point of view from Andrew Brown. But given 2020 so far, who knows.
Bonus: Andrew Brown on Afterpay (ASX: APT)' by Equity Mates Investing Podcast https://megaphone.link/ARN8492546613
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.
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.