Afterpay Limited (APT) is a technology company operating in the buy-now-pay-later (BNPL) industry. The company applies its technology to provide customers an interest free split payments option when buying products at retail and e-commerce outlets. It pulls this off by partnering with retail and e-commerce merchants and thus providing their customers with Afterpay’s service. APT’s technology mitigates the credit default risk it faces from its users by being able to assess their repayment capabilities in real time. Afterpay accepts domestic debit and credit cards. It has partnered with Visa, Mastercard and Amex. The firm operates in Australia, New Zealand, United States, Europe – under the Clearpay brand, and in August 2020, Canada.
There is a momentum building in Afterpay, the timeline for which is below. As of this moment, Afterpay has successfully launched in most developed economies.
The millennials were finance savvy. Gen Z are extremely tech and finance savvy. As a result – we see a boom in FinTech industry globally. Afterpay and FinTech alike is a low-margin-high volume industry. These firms will become profitable only through outrageous volumes in transactions. This is exactly why they have negative free cash flows. However, metrics that matter at this stage of the business lifecycle is Growth and Reinvestments. Afterpay has one of the strongest growth rates in customers and merchants – high supply and high demand, as reported in the most recent annual report. The below chart shows a 5.3million increase in customers in one year – that is, Afterpay added on an average 14,500 customers every single day. As long as there is demand from the customers, the merchants will come on the platform and pay the margin of their sales because of the excess sales Afterpay brings them.
Unlike most credit cards and BNPL providers, only about 14% of the Afterpay’s income comes from Customers. The repeat customer contribution from the past year’s data sits at 87% to 90% depending on the region. This is a very strong indicator that demand is not about to go anywhere. The retention metrics show immense strength and customer love is ever present – which is a huge deal in the payments industry.
Merchants cannot discount products on their own as it massively decreases margins. However, since Afterpay increases the sales of their partner merchants – the 4% fee that is charged is a no-brainer. The fact that Afterpay is one of the earliest and probably the most famous of all the players in the crowed BNPL segment means merchants will stick and keep the supply going. There was a 72% increase in active merchants from FY19 to FY20. With more businesses going digital in 2020, we expect Afterpay to be an incentive for merchants to sign-up and use it as a source for new customers.
Afterpay recently announced its entry into the Canadian market in August 2020. It continues to drive growth by announcing upcoming plans to expand in the European Union. Afterpay has acquired Pagantis under its wholly owned subsidiary Clearpay and is entering the $247b ecommerce market of Spain, France, Italy, and Portugal. The strategic acquisition reduces its risk of entering the EU market in 2021 as they procure a fully staffed and experienced team in Pagantis.
The firm successfully raised $650m via a fully underwritten institutional placement at $66 per share. In May 2020, Afterpay was added to the MSCI Australia Index – meaning fund managers will have to buy the stock in their portfolios in order to meet the benchmark.
Afterpay initiated initiates to manage its capital FY20, primarily its receivable warehouses. It established a US$200m warehouse with Goldman Sachs and reduced the warehouse from Citi to US$200m. The $500 million Australian warehouse funded by NAB and Citi was extended until FY23.
The firm has taken risk mitigating measures to be able to put its foot on the pedal and drive growth in the coming financial year.
The buy-now-pay-later (BNPL) industry is where payment solutions are provided to consumers and merchants, allowing the consumers to purchase goods and services immediately. However, interest free instalment payments can be made to cover the cost of the good or service.
BNPL is just one leg of a huge FinTech industry that is forecasted to boom in the coming years with the advancement and enablement of technology, as the world moves away from traditional financial services offered by banks with major clutters. BNPL is already a crowded space with a number of players offering similar services.
Operators in the BNPL industry are characterised by low losses, high re-investment, and low margins in the early and growth stage of the corporate life cycle. These firms with high-growth potential invest heavily (increasing costs) initially to penetrate markets and grow their users. Retention of these users and the expansion revenue each user brings are a couple of the key metrics that the industry tracks to measure performance and attach values to the firms.
The industry is forecasted to grow into with the growth of e-commerce across the world. Another complementing data point is the decrease in the use of credit cards and increase in the use of BNPL.
IBIS world and the RBA report that the BNPL market now leads the market for credit cards by approximately $400m. The flexibility that BNPL provided and the high adoption rates seen in consumers forecast these numbers to not go anywhere but higher.
Afterpay is subjected to a mixed bag of opinions when it comes to performance. High Growth comes at a risk in every sector and industry. But we believe Afterpay has more positives than negatives at this point in time.
It is true that bad debts can plague the firm, Afterpay as well as any player in the market for lending is exposed to this risk. Risk mitigation measures can be taken in the form of raising debt and equity by further diluting the firm. Both of which has occurred at Afterpay and has been covered in the company updates section of this report. The firm has enough provisions and cash to meet short-term obligations and bad debts that may occur. Going by its past performance, the provision for bad debts Afterpay holds in its financials is just about 20% of its revenues- suggesting most of its users do not default on payments. The average outstanding balances on an Afterpay account is about $190. Whereas it is $2889 for credit cards. A sharp contrast in just how risky credit cards defaults are compared to Afterpay.
With the increase in these provisions and as the firm readies itself to launch in other European markets and drive growth globally, it comes at a price – a rise in operating expenses. This is a common theme in every industry that is defined by low-margins and high-volumes. Afterpay is also doing the right thing to keep bad debts low, average order values are low at $153, repayment periods are short, and pausing accounts once a repayment is missed. This is an indication of a sound strategy where the firm does not compromise risk for growth benefits.
The segmented revenue growth figures from the below chart is a testament to the business model of the firm. The numbers speak for themselves in terms of adoption and growth in every possible stakeholder the firm needs for its successful operations. The growth figures in USA is an indication of what is to come from new markets that Afterpay is entering this coming year.
There is still strong growth in Afterpay’s most mature market. Despite Covid-19 impacts to the retail sector, revenues increased by $105m. A 46& increase in online sales growth compensated for the lower in-store sales due to Covid-19. A high acceptance + high frequency has led to higher profitability with 98% repeat customer contribution to revenues. The launch of new merchants will only increase the pipeline for more growth.
There was a 330% increase in Revenues from the USA, with an astounding 5m active user-base in just 2 years. The revenues from USA accounted for 30% of Afterpay’s total revenue. Afterpay already has tied down major retailers such as Levi’s and GAP and will continue to add to its growing merchants as stores re-open post the pandemic restrictions. Ultimately, we forecast the USA to eventually become the highest revenue generator for Afterpay.
APT stock will always be subjected to some degree of volatility due to swings in the mood and momentum of investors and traders. What the stock comes with though is a high growth forecast in the long-term as Afterpay enters new markets with the first player advantage. Hence, we give Afterpay a “Buy” recommendation to reap the rewards of a high growth technology business with an incredible business model to capture new markets.