Afterpay Holdings Ltd (ASX: AFY) listed on the ASX in May this year at $1.30. Since then, shares in the new kid on the block have skyrocketed over 100% as its growth momentum exceeds investor expectations.

With Afterpay reporting it secured another retail merchant – Country Road (and subsidiary brands) – to use its services, I think it’s time investors start to take note of this promising fintech star.

About Afterpay

Afterpay operates in the lucrative payment disruption sector, offering customers a real alternative to credit cards. The company is integrated with over 900 popular retail stores like Topshop, Mimco and Witchery to allow customers to buy now, pay later (hence the name).

Put simply, Afterpay instantly approves “credit” for eligible purchases and splits the repayments up into four equal fortnightly amounts. This enables customers to buy items in-store, or online instantly, and then have time to repay the purchase amount.

Users are not charged any fees or interest for using the service, but can be subject to late or missed payment fees. In essence, Afterpay is like a credit card offered by any of the big four banks or American Express, without the need for a formal application.

Growth outlook

Investors must remember that at this micro-cap level, stocks are susceptible to knee-jerk reactions at any sign of bad news.

As was seen with fellow micro-cap hopefuls Mobile Embrace Ltd (ASX: MBE) and Reffind Ltd (ASX: RFN), all it takes is one bad announcement to spell disaster for shareholder wealth. However, the saving grace for Afterpay appears to be its continued success in generating transaction growth and signing up new retail merchants.

As at 30 September 2016, Afterpay had increased its retail merchant numbers by a mind-boggling 166%. The merchant fees it generates (i.e. the money it receives from processing payments) were up 108% on the prior quarter, and based off unaudited figures the number of unique customers using Afterpay was up 83% on full year 2016 figures.

The only question mark in Afterpay’s 2016 results was its overall earnings (EBITDA) figure which sat at a net loss of $1.7 million, despite fourth-quarter revenue surging. Even so, the silver lining is that Afterpay’s business model is highly scalable and thus if management can continue to execute on strategy, earnings should swell.

Foolish takeaway

Whilst I can’t guarantee that Afterpay will enjoy fortunes as lucrative as leading payment disruptor PayPal, Afterpay’s current growth trajectory positions it to be a force in the innovative merchant payments industry.

Nevertheless, the stock requires some scepticism given it still trades at a loss.

Though, if management can entice big name stores like Myer Holdings Ltd (ASX: MYR), JB Hi Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) or the prized Woolworths Limited (ASX: WOW) to join its merchant list, its fortunes could turn very quickly.

In my mind, the stock is currently a speculative buy given its long-term business model remains untested. Watch this space.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.