Why Afterpay Holdings Ltd could shoot the lights out today

Shares in small-cap stock Afterpay Holdings Ltd (ASX: AFY) seem likely to soar today after the company released a business update to the market this morning. Afterpay operates a kind of reverse lay-by, where customers can ‘Shop Now, Pay Later’, with no extra fees when you pay on time.

As these figures show, Afterpay’s growth has been rapid:

source: Company update

source: Company update

The number of merchants signed up for Afterpay’s platform has surged by an astonishing 166% in the most recent quarter, while underlying merchant sales and Afterpay merchant fees both roughly doubled.

Surprisingly, the number of unique customers using Afterpay’s platform rose a ‘slower’ 83%, although the number of new merchants should lead to continued strong growth in this figure in the future.

Afterpay’s quarterly sales were a modest $1.8 million, which is small alongside the company’s market cap of $170 million. The kind of growth Afterpay is delivering would seem to justify today’s prices:

source: Company update

source: Company update

With 180,000 unique customers, Afterpay appears to have plenty of room to grow ahead of it. Shares in former parent Touchcorp Ltd (ASX: TCH) also seem likely to rise today, given that Touchcorp continues to hold ~30% of Afterpay. Afterpay is also well funded to continue growth, with $14 million in the bank, a current $36 million capital raising, and the negotiation of a $20 million credit facility with a major bank.

Afterpay has been a loss-making business until recently, but that will likely change this year thanks to recent growth. It doesn’t look as though it would be wise to bet against Afterpay, while major shareholder Touchcorp also looks attractive. Investors should be careful not to overpay though (pun intended -Ed), and remember though that there’s not much to prevent competitors like eBay or Amazon offering a similar service, given that these companies already have extensive retailer networks and e-payment infrastructure established.

zipMoney Ltd‘s (ASX: ZML) zipPay solution also appears to be quite similar to Afterpay’s, although zipPay can’t boast the same big brands as Afterpay.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia owns shares of TOUCHCORP FPO. 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.

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