Company Update: Afterpay

Thursday, June 6th, 2019

We recently revisited our Afterpay valuation to take account of the most recent data from web analytics. Web-derived data is incredibly useful for tracking up to date performance of online heavy businesses.

The two charts below illustrate the number of ratings the Afterpay app has received each day in the US and the number of new merchants Afterpay is adding per day on average on a monthly basis. This data suggests that US customer growth appears to be on track to materially exceed our previous FY2020 forecasts.


Figure 3 & 4. US App Ratings Per Day – 28 Day Moving Average & US Merchant Additions Per Day
Source: App Annie

US App ratings per day increased by 55% from December 2018 through to the end of April 2019. Extrapolating from the App ratings, we expect a similar increase in the rate of customer adds over this period. Based on disclosed customer numbers through to the end of December, we estimate that new customer adds were tracking at around 200k per month in April 2019.

Further, the number of new merchants added per day increased by 96% in one month from March to April. We estimate that this may translate to a further 20% increase in the rate of customer adds in the current month, given that merchants bring customers.

A continuation of these trends would see US customer numbers reach 1.8 million by June 2019, just over one year after launching in this market and potentially approaching 5.0 million by June 2020.

We have incorporated these forecasts into our model, resulting in a terminal year market share of online retail in the US of 4.9%, which compares to FY19 estimated market share in Australia of 11.9%.

We have also incorporated the currently issued options in the US subsidiary, which would convert to ~2.8% of common stock in FY2024 on our estimates, resulting in a small dilution effect.

These changes have resulted in an increase to our one-year forward valuation to $32.00 from $25.00. This implies a 34% total return at the current price of $23.92. We caution that valuation error is high at this early stage of the US and global expansion and also that APT is a very volatile stock.

It is also worth noting that Afterpay does not pay dividends and is not expected to for many years. This reflects the very rapid growth of the company which requires all earnings to be retained to support the balance sheet position. On the positive side, we expect the business can support our growth expectations with internally generated capital, while this does not rule out capital raisings in the medium term to invest in accelerated growth.

Afterpay, like a number of other leading listed information technology-related companies, is disrupting a very large addressable market. This offers the potential of a substantial global business in the future and often results in valuations that might be described as eye-watering on many metrics. We value Afterpay using a long term DCF, but one of the most common metrics used in reference to this type of company is the multiple of enterprise value to sales. This multiple can be compared to forecast revenue growth rates to provide one indication of whether a stock offers value or is overpriced. Pleasingly, as illustrated below, Afterpay screens well on this measure compared to other leading ASX listed tech stocks, namely Wisetech (WTC), Altium (ALU) and Xero (XRO).

 


Figure 5. Leading ASX listed tech stocks, EV/Sales compared to 3-year forecast revenue CAGR
Source: Macquarie Research, Clime fair value line added

Readers may note that we have been trimming the Clime Direct Model Portfolio position in Afterpay in recent months at prices at or below the current price. This reflects a desire to manage the portfolio weight given considerations of portfolio risk.

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