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Last edited 1 day ago

Afterpay have had perhaps a surprisingly resilient margin over the years, and I believe this will be managed well into the future. Their net transaction margin history: FY16 2.1%, 17: 2.5%, 18: 2.6%, 19: 2.3%, FY20: 2.3%, FY21H1: 2.2%. And this last result is indeed impressive given that 50% of volume in FY21H1 came through the newer markets of UK and US where scale benefits have not yet been reached.

My bullish take on margins:

  1. Competitive pressures: short-medium term, there has been no pressure on revenue margin, holding steady at 3.8%. It is possible merchant growth has slowed a little, but Afterpay has managed to retain its pricing power with the merchants who do choose to join. 
  2. Competition long term: BNPL industry will consolidate, with the minnows eventually going out of business due to lack of scale preventing profitability, or merging or being acquired. Paypal is an interesting case. They charge 2-3% vs. Aftepay's 3.8% average. However, Afterpay is a pure pay in 4 product, whereas Paypal is charging that fee for its pay-upfront product too. Their pay-upfront product is arguably over-priced, so adding on pay in 4 has simply made Paypal's core offering better value to merchants. This, I think, is why Afterpay has stuck to splitting purchases in 4 and not offering "pay in full upfront". It has kept its core value proposition to merchants, that is: "hey, we ONLY give your customers a pay in 4 option, so they have 4x spending power, so pay us a few % more, K?" (simplistic but you get the gist).
  3. Scale: As afterpay's volumes increase, it negotiates better terms with payment processors, improving margin.
  4. Customer base maturing: as Afterpay matures in each market, bad customers are weeded out, and losses improve. This improves margin.
  5. The dark horse: Afterpay Money - any customers that sign up to this bank account will be able to make Afterpay payments directly without card-payment rail involvement, saving Afterpay in processing costs. This banking platform is supposedly built to be back-end-bank agnostic through 10x Banking, so ideally Afterpay will be able to replicate this product around the world with retail banking partners overseas. 
  6. The long tail of smaller merchants. Afterpay enters new markets signing up big merchants, then as they build the network of customers, smaller merchants rush to get on board. Smaller merchants pay more, 6% +30c is typical. Afterpay has more customers in the US than AU (double) but has more merchants in AU than the US, so there is a way to go yet in the US. 
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#Q3 Update
Added 1 day ago

Andrew covered the key points announced in today’s Q3 Business Update (20/4/21), but much of the variance announced was YoY not QoQ, which can be more revealing.  I test the assumption in my previous valuation considering QoQ (new detail format attached):


·         Q3 GMV of $5.2b ($5.7b constant currency) is down from Q2 GMV of $5.7b, but this does not indicate growth has stalled. Last year the same thing happened, Q3 was 10% lower than Q2 – it’s seasonal.  Last year Q4 was up 50% on Q3 and I expect a similarly strong Q4 rebound given the quarter growth in customer (14.6m from 13.1m in Q2) and Merchants (85.8k from 74.7k in Q2).

·         My full year GMV target of $22.6b is still achievable based on prior year performance, also note that the US has taken the lead as the largest market for APT and has actually grown Q3 Vs Q2, so we see acceleration in it’s largest market opportunity.

·         Clearpay launched across Spain, France and Italy in March (Germany to follow), so in Q4 we will start seeing ex-UK Europe sales ($494b e-commerce market).

·         Margins and credit losses remain consistent with Merchant revenue margins are in line and so are Gross Losses, so no need to revisit margin or loss assumptions.

·         Product development such as the Afterpay Card in Australia (28 March launch), Squarespace partnership (live) and Afterpay Money (in development) progressing to maintain APT’s lead.

·         Regulatory engagement in ANZ and UK progressing constructively, still a threat but has been managed well to date.

·         The potential US listing is new news but not a surprise – a positive if any influence on price.


I don’t see any material change to growth, margins or credit loss assumption so will leave my valuation as is.  APT seem to be continue to deliver and I remain a very happy shareholder

View Attachment

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#Q3 Update
Added 2 days ago

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.


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Added 7 days ago

I took a break from Strawman back in 2019.  At that time, I made a post about APT, saying that they would have to show quick turn around on turning their "astronomical growth" into profits before I was willing to jump on board.  Regulatory concerns were drying up at the time and I knew back then that I was potentially going to miss out on some big gains but the looming threat I saw was the perception that APT's early entry would somehow provide them a moat from competitors.  What I really wanted to see was brand recognition.  The majority of brand recognition for APT comes from it's share price inflation, not the product.

The illusion of moat created by APTs growing infrastructure and partnerships is holding up longer than I thought it would.  The silent competitors that I felt were being left out of the picture weren't Z1P or the like, APT had a good headstart on them; it was household names, with established infrastructure.  The players that are only now starting to raise their heads; Commbank, Paypal etc.

The reason I feel that it's taken this long for them to stick their hands up, is tied to APT's profitability, or lack of.  2021 has the potential to be the first year that APT turns a profit.  Announcements from the other financial institutes saying they're now going to dip their toes in the water; coincidence? I think not.  Maybe it's a big nod to APT that they are finally impacting the institutions enough to bother them into action.

To all those who jumped on board at the time, tip of the hat to you.  Here we are almost 2 years later, the share price is 5x what it was when I made those comments (congratulations) but the company is still yet to realise a profit.   

When it finally does and investors see a 5 digit P/E ratio, will that be enough to end the hype train?  I don't know.  

When the big financial institutions decide it's worthwhile to write the code and add a BNPL option to the cards that everyone is carrying in their wallet already, I think that's when the market might react.

Am I disappointed I missed out on juicy gains.  Of course.  is this whole post sour grapes?  Potentially, but buying on hype is not my type of investing.  Nothing has changed in that regard during my absence and nothing has changed with APT in that time to aleviate any of my concerns.

I said it then, I'll say it now; if you're a holder, strap in, it's going to be a bumpy ride.

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#Bull Case
Added 2 weeks ago

Here’s what Morgan Stanley said about Afterpay:

‘APT’s US app downloads in Mar-2021 were >3x the amount in Mar-2020, and were even above the Dec-2020 seasonal peak. This suggests APT's platform in the US may be expanding more rapidly than we expect. Coupled with its recent entry into the EU, APT appears on track to build a global BNPL platform.’

Overall, Morgan Stanley remains bullish on Afterpay, reiterating their $159 price target and Overweight rating. That’s not quite as confident as they were before, mind you. In Mid-February MS analysts ratcheted up their price target on APT to $170. As investors fled the sector on mass, they lowered that price target.

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#IT Sector S&P500 vs ASX200
Last edited 2 months ago

07-Mar-2020:  I am not invested in APT, however I do note that the IT sector (including FinTechs) is the largest sector within the S&P500 in the US and it's one of the smallest sectors in our ASX200.  Information Technology companies account for just 4% of the ASX200 (the ASX's top 200 companies).  I therefore believe that the few tech companies that we do have to choose from here are more likely to get overbought and highly priced than might otherwise be the case.  This has included all of the WAAAX stocks at various times, of which APT is one.  It is also then not particularly surprising that when the market corrects or when there is a sustained sell-down or bear market, the sectors that have run the hardest are more likely than not to be the ones that fall the most.

The tech-heavy NASDAQ in the US has just fallen -12.54% in 14 days, one of the fastest corrections in history for that index (a "correction" is a 10% fall by definition).  Back home, over the past 18 days (13 trading days), since Tuesday 16-Feb-2021...

  • The S&P/ASX200 Index (XJO) has fallen -3%
  • The All Ordinaries Index (XAO) has fallen -3.4%
  • The S&P/ASX200 Information Technology Sector (XIJ) has fallen -16.5%
  • The S&P/ASX All Technology Index (XTX) has fallen -15%
  • APT has fallen -24.8% from $153.46/share to $115.40.

Some sectors, like Energy and Financials are actually positive over that same period - Financials were up +3% - which is what's saving our XJO and XAO indices from looking a lot worse, particularly as Financials is the largest sector in the ASX200.  It's why many of us are feeling a lot more pain or staring at a lot more damage than what the headline index numbers are suggesting has occurred.  Unless you've got a market-weight allocation to our big banks, which is a lot (and I don't), or better (even more bank shares), then you are likely to have seen heavier falls in your portfolio(s) than experienced by the ASX200 or the All Ords indices.

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#Fundie / Analyst Views
Added 2 months ago

Monash Investors' Simon Shields' view on AfterPay as discussed in Buy Hold & Sell segment on Livewire today:

Matthew Kidman: And here we go with our new segment, and this is where you earn your money, guys, Questions Without Notice. Michelle, you're going to go first. You got something for Simon, so it knocks him off his feet and he doesn't know what to say.

Michelle Lopez: Well, I'm going to carry on with the whole tech and growth thematic that we've just been talking about. And I know, Simon, you're quite a bull, I guess, on Afterpay. And just wanting to ask you one question. What's the one insight that the bears are missing on Afterpay, and where do you see value in Afterpay?

Simon Shields: Okay. The big insight that the bears are missing on Afterpay (ASX:APT) when they do their forecasts, is around the frequency of use by customers, the longer the customer has been a customer. So in the first year, the customer would use it four or five times. And that grows to 12 times in the third year. And now, when you go four-plus years out... and, of course, that's lengthening as well... you're up to 29 times. Now that sounds like a lot. But when you bring that back to how many times a month that is, that's less than three times a month. And we're not talking about big amounts of money for each transaction. So that's what they've missed. 

Now, I have been a big bull on Afterpay. I think the business is a magnificent business. But in fact, we sold out completely of our Afterpay at $150 a share. Right? And that's because we've got a view about what Afterpay is going to do over the next five, seven, eight years. And because of that frequency of use insight, it's actually easier to forecast the forward revenues on Afterpay than what it is for a normal company that's having to go out every year and re-establish new customers and so forth. 

So, essentially, at $150 we felt that we were getting paid for the next seven or eight years of execution by Afterpay. So why wait around and see if they do a good job doing it? We took our money, and we left. And so, if it comes back enough, then it's upside might meet our hurdles again. And we may go back in.

My view: Simon was an early bull on AfterPay. The fact that he sold out completely at $150 is a good indication that AfterPay could struggle to go much higher from there in the short term, considering the macro environment we are in. 

Disc: I hold on my personal portfolio 

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#UK Media Release2/2/21
Added 3 months ago

 Afterpay Limited (Afterpay) attaches a Clearpay media release to be distributed in the UK regarding the release of the Woolard Review and the report’s proposal to bring the ‘Buy Now Pay Later’ industry under FCA oversight with proportionate regulation

View Attachment

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#Fundie / Analyst Views
Added 3 months ago

Dodging the darlings and loving the lonely


Allan Gray

Our lack of exposure to the high-growth technology sector and the stable earnings streams from the healthcare and consumer staples sectors may seem extreme. But so are the prices one pays for companies in those sectors today. 

Consider a hypothetical market darling, whose growth runway extends many years into the future due to its highly sought-after product or service and significant barriers to competition. 

Even if it's clearly attractive, there is a price that is simply too high and exceeds the value of the likely trajectory of future earnings. No company is worth an infinite amount. 

At the other end of the spectrum is a cyclical company with a bleak growth outlook. But a bleak outlook does not necessarily mean the company’s shares are worth zero. Navigating the grey area between these extremes requires a focus on underlying fundamentals.

Knowing when a market darling’s price is too high is no less important than knowing when an underperforming company’s share price is low enough. 

Avoiding the former and building a portfolio of the latter will generate outsized investment returns in the long term, but it’s not easy to do consistently.

We have recently accumulated a stake in South32 Limited, an out-of-favour company that we think is attractively priced. At the other end of the spectrum, an expensive market darling we don’t own, is Afterpay. Sudhir Kissun discusses South32 below, followed by my analysis of Afterpay.

About South32 Limited

In 2015, BHP demerged a diverse portfolio of assets that it considered non-core, creating a new separately listed entity named South32 Limited. The main commodity exposures and assets of South32 are as follows:

  • Alumina and aluminium: The Boddington bauxite mine and Worsley alumina refinery in Western Australia, the MRN bauxite mine and Alumar alumina refinery in Brazil, and two aluminium smelters in South Africa and Mozambique that source their alumina requirements from South32’s alumina refineries.
  • Manganese: The GEMCO manganese mine in the Northern Territory, two manganese mines in South Africa, and a manganese alloy smelter in South Africa.
  • Coal: Metallurgical coal mines at Illawarra in New South Wales, and thermal coal mines in South Africa (the South African operation is in the process of being divested).
  • Nickel: The Cerro Matoso nickel mine in Colombia.
  • Silver, lead and zinc: The Cannington mine in Queensland.
  • Other: An investment in the Hermosa zinc, lead, silver and manganese asset in Arizona in the USA, which is currently in the development phase, and various other exploration and development ventures.

The earnings contributions of each of these assets will vary from year to year depending mainly on commodity price movements, but also on production volumes, operating costs and expenditures on sustaining capital. Through the cycle, we estimate the contributions to earnings before interest and taxes (EBIT) to be as per Graph 1.

Graph 1 - Estimated contributions to EBIT by commodity group


Source: Company financials, Allan Gray.

It is important to point out that the reserve lives of the individual assets differ. The Boddington bauxite mine has many decades of low-cost, high-quality reserves and resources available, whereas for most of South32’s other assets the reserve lives range between 9 and 18 years. Therefore, while alumina (which is produced from bauxite) is a large earnings contributor, it is an even larger component of the company’s overall value.

It is also worth noting that the key end-markets for South32’s commodities are aluminium and steel (with manganese, metallurgical coal and nickel being key inputs into the steelmaking process). Our view is that both these end-markets should exhibit sustainable demand growth over the long term as they have over the last few decades. Steel demand will be dependent on emerging countries continuing to industrialise and develop new infrastructure, while developed countries replace ageing infrastructure. Aluminium uptake will be supported by consumer demand for housing, automobiles, and packaged goods, to name a few.

As contrarian investors, we aim to adopt a countercyclical approach

Our interest in South32 was piqued after a period of significant weakness in the prices of the commodities that make the largest contributions to its earnings (notably alumina, aluminium, manganese and metallurgical coal, as depicted in Graph 2).

The price weakness began in mid-to-late 2018 and was exacerbated by the demand destruction caused by COVID-19. We now have a situation where South32’s commodity prices, and therefore earnings, are low relative to history. As shown in Graph 2, with the exception of aluminium, the prices of South32’s other key commodities have been higher than today’s levels for most of the past 10 years.

Graph 2: Historical prices of South32’s key commodities


Source: Platts, Bloomberg, Metal Bulletin, UBS

Commodity share prices indirectly reflect market expectations of future underlying commodity prices. As contrarian investors, we prefer to adopt a ‘countercyclical’ approach: we buy companies when prices are depressed and the share price of the company reflects an expectation that earnings will remain low for the long term. Our view is that it is overly pessimistic to extrapolate today’s low commodity prices too far into the future, given the supply-demand imbalance that this will likely create. We believe South32’s share price today incorporates a lot of pessimism, creating an attractive buying opportunity for patient long-term investors.

South32 has two other attributes that we find attractive. Firstly, it is a low-cost producer, with most of its operations positioned in the first quartile of the cost curve. It can therefore withstand deep price troughs while mostly still generating positive free cash flow. Secondly, it has a strong balance sheet with a cash balance that exceeds its borrowings, so during periods of weak commodity prices (and therefore weak cash flow) it is not under pressure to service an onerous debt burden. Its strong balance sheet also means it is potentially well-positioned to take advantage of any cheap acquisition opportunities that may arise.

What do we pay for South32?

While it’s impossible to predict which of South32’s operations will outperform or underperform in any given year, we estimate that its portfolio of operations in aggregate should be able to generate pre-tax earnings of US$1.3 billion to US$1.5 billion per annum through the cycle. We estimate that this represents a high single-digit return on the capital that would be required to replicate South32’s portfolio of operating assets today. This does not seem excessive to us. With an enterprise value (EV) of just under US$11 billion, inclusive of the future cost of closing and rehabilitating its mine sites, the company is currently valued by the market at seven to eight times these earnings. 

We can compare the earnings multiple to South32’s weighted-average reserve life, which is approximately 16 years. With a market capitalisation of a little over US$9 billion and our estimate of post-tax earnings of US$900 million to $1 billion, South32 is trading at 9 to 10 times post-tax earnings. We are therefore expecting to receive 16 years’ worth of earnings, but only paying for 9 to 10 years of those earnings. This strikes us as a good deal.

In addition to the attractive earnings multiple, we have identified three additional sources of upside that may or may not materialise.

  1. The Hermosa asset in which South32 has invested US$1.6 billion to date. We have not accounted for any EBIT contribution from this asset in our earlier estimate of US$1.3 billion to US$1.5 billion. Even a sub-par return on the investment in Hermosa would represent attractive upside.
  2. South32 is in the very early stages of exploring a low-cost option to extend the life of the GEMCO manganese mine. If this extension is successful, it has the potential to meaningfully increase the value of the company.
  3. If South32 manages to complete the sale of their South African thermal coal business, US$700 million of rehabilitation liabilities will be released from the balance sheet.

Our investment thesis is not dependent on any of these three events coming to pass, but if they do, the upside in South32 could be compelling.

As with any investment, a lot could go wrong from here. Structural, political, regulatory or other factors could conspire to negatively impact South32’s commodity prices, sales volumes or production costs. While it is difficult to quantify these uncertainties, our view is that the low earnings multiple that investors pay today, alongside the company’s assets (which are low on the cost curve), and a strong balance sheet provide a reasonable margin of safety against adverse future outcomes.

About Afterpay Limited

Afterpay is a buy-now-pay-later facilitator that allows its users to split the cost of retail 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 and generates its revenue by charging retailers a percentage of the merchant sales it facilitates as well as by charging its users late fees.

Afterpay’s business is best understood with reference to its unit economics. Table 1 shows its 2020 annual results with reference to its underlying merchant sales.

For the year ended 30 June 2020, retailers were charged 4.1% of merchant sales on average. The company made a further 0.6% of merchant sales in late fees and incurred non-scalable processing costs totalling 1.2% of merchant sales. It incurred bad debts of 0.9% with the net of all these amounts, its net transaction margin (NTM) being 2.6% of merchant sales. It targets an NTM of greater than 2%. Below this NTM are almost $300 million in scalable costs dedicated to customer acquisition, business development, head office costs, IT development and so on.

How successful might Afterpay be?

In order to determine what a mature and successful Afterpay might look like, we first need to determine how big its addressable market is. In Australia, retail sales excluding food retailing, cafés, restaurants and takeaway food services amounted to $104billion for the 12 months to September 2020. This represents approximately 5% of Australia’s gross domestic product.

We can use Australia’s addressable market to infer Afterpay’s total addressable market from the geographies in which it is seeking to grow. The combined GDP of the United States, Australia, the United Kingdom, Canada, Spain, France, Italy and Portugal (Afterpay’s chosen target markets) was US$33.7 trillion in 2019 (and likely lower in 2020). Assuming the same 5% addressable market share as in Australia, Afterpay’s addressable market would be US$1.7 trillion or about A$2.3 trillion in merchant sales.

Table 1: Afterpay’s unit economics


Source: Afterpay Annual Report 2020.

Mastercard’s share of global consumer-to-business purchases is 14%. Let’s assume the successful and mature Afterpay has a market share that matches that of Mastercard’s. This would imply merchant sales of $322 billion (14% of $2.3 trillion). 

How profitable might a successful Afterpay be?

Using this level of merchant sales and the unit economics detailed above, it is possible to calculate how much profit Afterpay will generate. First we need to make two important assumptions:

  1. The current NTM of approximately 2.5% is sustainable.
  2. Afterpay’s scalable cost base will only grow by half of the dollar transaction margin growth.

Using the above, we can calculate that Afterpay’s earnings before interest and taxes would be $3.7 billion. 


How much does an investor pay for Afterpay?

Afterpay currently has a market capitalisation of over $30 billion. It is largely debt free today, but would require a further $18 billion in capital were merchant sales to grow by over $300 billion. Its enterprise value then (assuming the share price doesn’t change between now and then) would be close to $50 billion. Investors are paying over 13 times those future preinterest and pre-tax earnings today.

This mature Afterpay should be as cyclical as any other shortterm money-lender. Its fortunes will rise and fall with the economic cycle that already sees retail spending (upon which it relies heavily) and bad and doubtful debts fluctuate. Banks, which are similarly exposed but have both a more secured loan book (Afterpay’s loan book is unsecured) and longer-dated lending profile (Afterpay’s loans are repaid over six weeks) trade at much lower multiples than this today.

There are a few obvious pitfalls in the analysis above. For example, Afterpay could expand beyond the chosen geographies in our analysis. The bigger Visa might be a better benchmark to judge success than its smaller rival Mastercard. Its customer database might have considerable value across a number of adjacencies that Afterpay is not currently targeting. Or its costs might scale far better than the 50% we have assumed (though doing so would place them among the very best technology companies). But there are also significant risks that we’ve not mentioned (e.g. regulatory risk and competition) that will go a long way towards offsetting any upside and an almost certain near-term future of no or very low profits (as distinct from an established lender like a bank). 

At today’s price, the risks in owning Afterpay seem heavily skewed to the downside.

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#Why APT is not BTC
Last edited 3 months ago

Thanks for the update on APT Dazbo  

 A few years ago I did a head to head comparison of signing up and then buying stuff with Zip (which I held) and APT ( which I didn't). I have never used Zip. I sold my holding. And bought APT. 

I agree it is a great product. I use it regularly now. 
foolishly I sold my APT shares at ~$27. 
one of my many regrets!

As you point out, valuing it now is a huge challenge. However in your thesis you state it is the incumbent BTC to other products alt-coins ie is going to benefit from ever increasing network effects.  That may be true in ANZ but may not true in other geographies. Klarna is huge in Europe and giving them a run for their money in the US. And CBA are betting heavily on them in ANZ  

Affirm has more regular monthly users. (Not registered users)

and there are now a whole bunch of competitors likely to compress margins. 

Happy to keep using there product and im certainly not betting against them, but at these prices I'm not betting on them either! 

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Last edited 3 months ago

Great company. My only concern with this company was that it hadn't been tested with a decent recession. Well, that worry certainly took care of itself during the Covid epidemic. If any company needed a proper test to prove their mettle that was it!! Management are grounded, rational, run with the numbers, have grit and aren't easily rattled. I think APT has the makings of a brilliant Apex Predator in this space. The concept is beautifully elegant and simple and customers are raving fans. The network effect is strong and getting stronger. In the end why mess around with something that works? Sure there are tons of competitors now but if I were to draw analogy I'd liken AfterPay to Bitcoin and all its competitors to Altcoins (or shitcoins as they're called in the trade). Sure there are arguably more interesting systems than Bitcoin, but Bitcoin owns the market share of mind. I think APT will do this too. It already has in Australia. It just needs to keep on keeping on in the US and then the world. Has the potential to be a real alternative to Mastercard and Visa and therefore far more market cap growth. Valuation? Not prepared to be specific. Needless to say short this one at your own peril.

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#Bull Case
Added 4 months ago

Admissions to ASX20 has put a rocket under the APT stock price as expected. Admission to ASX10 will take it to $200 as predicted 2 months ago. Large fund managers can no longer ignore this stock and even though the dramatic rise over the last two months has been astonishing it will continue to not disappoint. 

US penetration is getting deeper and deeper and even bigger companies like Tencent who invested 5% back in May 2020 have very deep pockets should the need arise to raise more capital to continue scaling up to a point where APT becomes an incredible cash cow company.





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#APT enters the ASX20 & ASX50
Added 4 months ago

From December 21, 2020, APT and XRO will enter the S&P ASX50 index.  OSH & VCX are the two stocks moving out to make room them..

APT is also entering the ASX20 index (replacing IAG), which is a MAJOR milestone!  

Other index inclusions and removals:

ASX100:  In: IEL, MIN, REH.  Out: ILU, FLT, NHF.

ASX200:  In: KGN, REH.   Out: AVH, COE, WSA

ASX All Technology Index:  In: 3DP, 4DX, BID, DTC, FDV, FZO, HTG, LBY, MMM, OTW, TNT, WBT, YOJ.  Out: RAP.

All of these changes will occur prior to trading on Monday December 21st, 2020.  See here.

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#Bear Case
Last edited 5 months ago


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

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#Fund manager thesis
Last edited 5 months ago

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.

Hayden Capital - Nov Qtrly letter (APT on 7th page)

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#Fundie / Analyst Views
Added 5 months ago

14-Nov-2020:  From two days ago (12-Nov-2020):

SIMON MAWHINNEY from Allan Gray Australia (deep value investors) gives a decent Bear Case for APT here:

Afterpay – buy now, pain later?

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.]

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#Fundie / Analyst Views
Last edited 6 months ago


It's all about growth in Buy Now Pay Later

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.]

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#Broker / Analyst Views
Added 6 months ago

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:

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#CFO departure
Added 7 months ago

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

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#Paypal enters BNPL market
Last edited 8 months ago

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%.

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#ASX Announcements
Added 8 months ago

Afterpay to expand into Europe


  • Afterpay is expediting its expansion into new markets to capitalise on strong consumer and merchant demand and to increase its global footprint.
  • Afterpay has identified the European Union (EU) as the next logical step for international expansion due to its large millennial population, vast fashion and beauty retail markets, and significant debit card usage.
  • The addressable ecommerce market in the EU exceeds €300b1 ($494b).
  • Afterpay has entered into an Agreement to acquire Pagantis. Pagantis currently provides a range of buy now, pay later and traditional credit services across Spain, France and Italy with regulatory approval to also operate in Portugal. The addressable ecommerce market in these 4 countries exceeds €150b1 ($247b).
  • This acquisition accelerates and de-risks the roll-out of Afterpay’s Clearpay branded platform across the EU market with launch targeted for Q3 FY21.
  • The acquisition provides a fully staffed and experienced team, an existing technology stack and intellectual property as well as an immediate regulatory right to operate across all EU member states (subject to regulatory approval).
  • Pagantis’ current business which includes its existing technology and traditional credit style products (Pagantis Legacy Business) will be managed as follows on completion of the acquisition:
    * Existing technology will be re-configured to provide the Afterpay core product, and the business will be rebranded to Clearpay, enabling an expedited launch into Spain, France, Italy and Portugal with local language compatibility.
    * Pagantis’ existing consumer fee instalment and credit card offerings will be discontinued post completion of the acquisition.
    * Existing loan book will be retained by NBQ and is excluded from the transaction.
  • As part of the Agreement, NBQ will receive a minimum €50m in consideration (subject to customary adjustments), payable as follows:
    * Upfront Consideration - €5m in cash payable at completion; and
    * Deferred Consideration - €45m in cash, payable 3 years post completion. Deferred Consideration can exceed €45m, with any excess being payable in cash or Afterpay shares (at Afterpay’s election), provided the equity value of Pagantis exceeds €45m, 3 years post completion.
  • Completion of the acquisition is expected to occur in or before December 2020, subject to Bank of Spain regulatory approval to the proposed change of control.

View Attachment

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#Bear Case
Added 9 months ago

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.

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Added 9 months ago

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

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#Too expensive?
Last edited 9 months ago

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. 

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#Capital Raise
Added 10 months ago

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

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#Hiring During COVID
Last edited 10 months ago

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.


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#Tencent buys 5% of APT
Last edited 12 months ago

01-May-2020 (7:23pm):  Afterpay welcomes Tencent as a substantial holder

Media Release, 1 May 2020.


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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Added one year ago

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. 

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#H1 2020 - Results
Added one year ago

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 -






Partnerships - VISA in the US, and Mastercard in ANZ.

Regulatory Developments:
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:

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#ASX Announcements
Added one year ago

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. 

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