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Why the Afterpay Holdings Ltd share price is going gangbusters today

Shares in consumer credit business Afterpay Holdings Ltd (ASX: AFY) are on fire this morning after the company updated the market as to its recent sales numbers and retailer sign ups.

The group’s technology means mainly apparel retailers can sell clobber on a buy now, pay later basis to consumers in exchange for paying a small fee to Afterpay on each transaction.

Notably, Afterpay wears the credit risk if the consumer fails to “pay later”, which means the payment innovator’s services are popular with retailers as they can encourage shoppers to spend more.

Recently, Afterpay has signed up large clients such as fast-fashion conglomerate Premier Investments Limited (ASX: PMV) and department store operator Myer Holdings Ltd (ASX: MYR). While Big W and Officeworks operated by Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) are also on board with Afterpay. The group also recently announced a deal with Kiwi e-commerce giant Trade Me Group Ltd (ASX: TME).

Afterpay said it effectively underwrote some $165 million in retail sales for the two months ending May 31 2017, which is already more than total sales for the quarter ending March 31 2017.

Of course the accelerating sales require the extension of more credit, with the group stating it has upgraded its “Receivables Funding Facility” with the National Australia Bank Ltd (ASX: NAB) to $200 million on improved pricing terms.

The company stated that the “weighted average duration of its receivables book remains less than 30 calendar days” and investors should note a key risk around this business remains bad debts.

The group added more detail as to how it manages its balance sheet by stating that it can now  “support a receivables book of more than twelve times the value of its combined debt and equity base” to mean that it could support “well over” $2.5 billion of annualised underlying sales.

The accelerating growth is certainly exciting investors, although given the risks around its consumer-credit-extending business model I have a feeling the Afterpay share price may be getting ahead of itself, even keeping in mind the intention to merge with Touchcorp Ltd (ASX: TCH).

As an investor I would like to see the Afterpay business make strides to being operating cash flow positive before I considered shopping for shares given today’s big valuation.

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Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

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.