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Why I still rate Afterpay Touch Group Ltd a buy at this price

The rise of Afterpay Touch Group Ltd (ASX: APT) is fast becoming a fin-tech fairy tale. The start-up began its life offering a simple online service to mostly female millennial fashion shoppers: buy now, pay later – in four equal interest-free instalments over a 56 day period.

Since then the number of retail merchants using its products has expanded rapidly, along with its customer demographic – it’s no longer just women’s fashion that you can buy using Afterpay’s repayment model.

Plus, Afterpay has been taken up instore as well online. You may have noticed the Afterpay symbol proudly displayed in shop windows or at the checkout in major stores during the Christmas and Boxing Day sales. Afterpay counts big department store owners Myer Holdings Ltd (ASX: MYR) and David Jones amongst the retailers promoting its service, and even Qantas Airways Limited (ASX: QAN) subsidiary Jetstar now allows you to pay for flights on its website using Afterpay.

But despite its deepening market penetration the product itself has essentially stayed the same: buy now, pay later. And, perhaps because of its simplicity, this straightforward service is fast turning into disruptive fin-tech.

Afterpay makes its cash through a fee paid to it by merchants, rather than interest extracted from customers (although there are late fees of $7-$10 for missed payments). That is to say that Afterpay does not want to appear like just another payday lender giving you a small loan and charging you crazy interest rates.

And it is willing to maintain the highest levels of compliance. Despite the fact that it technically doesn’t supply credit, and therefore doesn’t strictly fall under ASIC’s purview, it took out a lending license with the regulator anyway.

Afterpay also limits the amount customers can spend through its platform based on the customer’s existing funds and prior repayment history with Afterpay – which is also a clever way of rewarding repeat users. This policy has helped Afterpay keep net transaction losses to 0.8% of underlying sales.

It’s possible that Afterpay didn’t even foresee its rapid uptake amongst retailers – the market was certainly caught off-guard. In the company’s second quarter FY18 announcement released on 16 January, it declared underlying sales for the first half of fiscal year 2018 to be $918 million, up a massive 533% on 1H17. It claims annualised sales are now tracking in excess of $2 billion.

In fact, metrics across the board were all positive. The number of customers using Afterpay grew 36% for the quarter and the number of merchants adopting the platform was up by 32%. And repeat customer transactions per month were over 80%, showing an impressive level of brand loyalty.

The other big piece of news Afterpay released on January 16 was that it was entering into a strategic partnership with US-based venture capital firm Matrix Partners. Matrix – famously an early-stage investor in Apple Inc. – has invested $18.75 million into Afterpay, and one of its general partners is now joining the Afterpay board to provide advice on a possible US expansion.

As you can imagine, the market basically lost its mind after this barrage of good news, and Afterpay’s share price rocketed up 15% on the day of the announcements.

So the key question: is it too late to buy?

Goldman Sachs recently slapped a buy rating on the stock with a price target of $7.30. The share price has since easily blasted through that ceiling and closed at $7.49 on Friday afternoon, after hitting an all-time high of $8.16 during Wednesday trading.

But Goldman set their price target prior to the FY18 earnings upgrade and talk of a possible US expansion.

I’m still bullish on Afterpay at this price. The great thing about its platform is how easily and quickly it is being adopted by both customers and retailers. If it does break into the US market and uptake is as quick there as it was here, there’s no reason Afterpay can’t continue to expand globally over the next few years and become a real blue chip tech stock.  

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T 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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