Are Afterpay Touch Group Ltd shares a buy after its company update?

In late morning trade the Afterpay Touch Group Ltd (ASX: APT) share price has recovered from its heavy declines following the release of a company update and is down just 3% to $5.83

Prior to the release, the fintech company’s shares were down as much as 9.5%.

What was in the update?

The comprehensive report was made in response to recent reports commenting on Afterpay’s systems and processes and the founding shareholders commitment to the company after the expiry of their escrowed shares.

In the update management reiterated that it is committed to responsible consumer spending and reminded the market that it “applies a proprietary fraud and repayment capability check for every order approved and rejects approximately 30% of attempted transactions based on this check.”

As a result of these checks, its net transaction loss due to payment difficulties was 0.7% in the first-half of FY 2018. This is low compared to industry standards.

One important piece of information that was provided was related to its late fees. There has been a lot of talk of late fees being a key contributor of revenue, something that would almost certainly be unsustainable.

Management advised that late fees are less than losses incurred. Thus, the business model is underpinned by customers that pay on time and not from customers making late fees.

The update finished with a comment on the holdings of Anthony Eisen and Nick Molnar which total 23% of issued capital. Both are subject to a two-year ASX escrow restriction which expires on May 8.

While they both intend to sell shares when the escrow restriction expires, subject to share price and general market conditions, they intend to only sell up to 10% of their underlying individual shareholdings (less than 2.5% of total issued capital) over the next twelve months for asset diversification reasons.

Should you invest?

I think this company update was a great move by management and appears to have settled the nerves of investors.

So with the selling appearing to have come to an end, investors might want to consider picking up shares on the cheap now. Though, it is worth noting that it is a reasonably high risk investment and may be unsuitable for investors with a low tolerance for risk.

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