What has happened to the share price of Afterpay Touch Group Ltd?

Only a few months ago many investors (myself included) were singing the praises of Afterpay Touch Group Ltd (ASX:APT). Afterpay’s share price was consistently reaching new highs, and the company had a really simple and easy to understand business model that seemed readily scalable.

Afterpay offers a simple online and instore service to its customers: buy now, pay later – in four equal fortnightly interest-free instalments. Big retailers like Myer and David Jones had started offering Afterpay’s service instore and there was even talk of a possible US expansion.

But since hitting an all-time high of $8.16 in January, shares in Afterpay have shed over 33% of their value and were trading at only $5.45 when the market closed on Friday.

So what happened?

Afterpay has started to cop some bad press.

The Australian Financial Review cited a report by governance firm Ownership Matters that detailed how a minor was able to set up an account with Afterpay to purchase $300 worth of alcohol. The report questioned Afterpay’s internal controls and processes when taking on new customers. And these allegations are serious: Afterpay will undoubtedly come under intense scrutiny from regulators if it is found that customers can use its platform to essentially break the law.

And this isn’t the only reason that Afterpay could be on the receiving end of unwanted attention from regulators. There have been rumours, reported by the AFR as far back as November 2017, that ASIC intends on conducting a review into the new ‘buy now, pay later’ sector, which includes other listed companies like Zip Co Ltd (ASX:Z1P) and FlexiGroup Limited (ASX:FXL).

The review would attempt to address concerns raised by various groups around whether these companies should be classified as credit providers. If they were, the companies would have to conduct credit checks of their customers and may have to make other changes to their business models.

For Afterpay, the risk is that the costs of conducting these sorts of checks would hurt its margins. Plus customer uptake of its payment platform may decline if Afterpay is forced to reject people with low credit ratings. At the moment, Afterpay’s argument is that, seeing as it doesn’t charge interest or other account fees, its payment service shouldn’t be classed as providing credit.

All this culminated in the company releasing an update to the market last week. In the update, Afterpay specifically addressed the alleged abuse of its platform by underage users, stating it would upgrade its systems to stop such purchases and would suspend merchants who it suspected were not adhering to state and federal laws.

The update also attempted to assure the market that its business model was healthy and sustainable.

Afterpay stated that 90% of monthly transactions were made by returning customers, which proves it has a loyal base of customers who value the service and pay their outstanding balances on time.

The net transaction loss due to payment difficulties was only 0.7% in first half FY18, and late fees amounted to less than losses incurred. In fact, Afterpay claimed that 93% of purchases made using its platform do not incur late fees, and are therefore an entirely free service for the end consumer. This in particular shows that overwhelmingly customers are not using the service to pay for anything they can’t actually afford.

It is important for Afterpay to reinforce this message so that its service doesn’t get lumped in with high-interest payday lenders.

So is Afterpay still a buy?

Afterpay says that it welcomes a review of the sector conducted by regulators. Although it’s not as though it has much of a choice, really. But the company does have a history of compliance, even voluntarily taking out a lending licence with ASIC when it didn’t need one. Based on recent developments, management at Afterpay might be happy they have that up their sleeve.

The bottom line is that, for the time being at least, Afterpay’s strong FY18 outlook still stands, a US expansion is still on the table, and customers seem to still be enthusiastic about its service.

The increased attention from regulators does pose a significant and unwelcome risk which shouldn’t be ignore, particularly for investors with a small appetite for risk. But if you’re still bullish on Afterpay this dip in its share price might actually provide a great buying opportunity.

Don't Buy A SINGLE Stock Until You Read This

While conflict overseas is all media talking-heads seem to mention these days, the billionaire founder of Tesla is losing sleep over what he sees as a far bigger threat.

Elon Musk Warns: This has "vastly more risk than North Korea"

If you missed your opportunity to get in on Google, Microsoft, or Amazon in their early days, don't let it happen again. This emerging technology trend could offer a second chance for anyone who wishes they took part in these millionaire-maker stocks.

Click here to discover more!

Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. 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 Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!