Afterpay Holdings Ltd enters New Zealand with Trade Me Group Ltd deal

Hot fintech business Afterpay Holdings Ltd (ASX: AFY) announced it has signed a deal with New Zealand e-commerce giant Trade Me Group Ltd (ASX: TME) today in its first move into an overseas market.

Afterpay operates a buy now, pay later, service for shopaholics and retailers that helps the retailers lift sales, while Afterpay wears the credit risk of the shopper defaulting in exchange for a small fee from the retailers.

Trade Me is New Zealand’s leading online marketplace where Kiwis buy and sell literally everything from multi-million dollar houses to second-hand sneakers. It splits out its operations between “classifieds advertising” (i.e. jobs, flat mates, dates) and “marketplaces” where retailers of all sizes can advertise goods for online sale and delivery.

Afterpay has struck a deal with the marketplaces part of the business, which reportedly posted gross merchandise sales of NZ$422 million for the six-month period ending December 31, 2016.

Afterpay also recently announced a merger with payments technology business Touchcorp Ltd (ASX: TCH) and the combined groups look a stronger investment prospect than they do apart. This is because Touchcorp is profitable and Afterpay posting blockbuster growth, but nowhere near profitable.

For now I would prefer to keep the combined Afterpay group on the watch list as although it is growing strongly the credit-extending business model carries considerable risk and it posted a net loss of $1.4 million for the half-year period ending December 31 2016, with cash flows far worse off.

Trade Me on the other hand is a textbook business demonstrating the strength of the digital economy with a long track record of revenue and profit growth, despite a recent period of reinvestment back into the business. The reinvestment is because Trade Me clearly faces rising competition from the likes of Facebook, Google and Amazon as they move to provide their own online marketplaces that could threaten its dominant network effect in New Zealand.

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Motley Fool contributor Tom Richardson owns shares in Facebook, Google, and Amazon Inc.

You can find Tom on Twitter @tommyr345

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.

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