The Afterpay Touch Group Ltd (ASX: APT) share price may have fallen sharply on Thursday, but it could be a very different story today after the payment solutions company was the subject of a positive broker note.
According to a note out of Goldman Sachs, the broker has upgraded Afterpay Touch’s shares from a neutral rating to a buy.
In addition to this, its analysts have lifted the price target on its shares from $6.30 all the way up to $11.15. This price target implies potential upside of almost 30% over the next 12 months.
Why is Goldman Sachs bullish on Afterpay Touch?
Goldman has made the move after upgrading its assessment of the company’s potential in the lucrative U.S. market.
It isn’t hard to see why. In comparison to Australia, the size of the population is 13x greater, the online apparel and footwear market is 14x bigger, and the in-store opportunity is estimated to be 15x larger.
But with a market of this size some investors have been concerned that the potential cost of customer acquisition could be significantly higher. Afterpay’s growth in Australia has come with exceptionally low customer acquisition costs and pleasingly Goldman doesn’t see it being any different in the United States.
It expects a retailer-driven push of the Afterpay product which results in early consumer awareness and rapid adoption at a very low cost. The broker has pointed to increasing searches for “Afterpay” in Google across U.S. states as proof of this strategy working.
If all goes to plan Goldman has forecast Afterpay Touch to generate total revenue of $229.5 million in FY 2019 and then $414.3 million in FY 2020. On the bottom line this is expected to result in earnings per share of 10 cents in FY 2019 and 25 cents FY 2020.
Should you invest?
Based on Goldman’s forecasts, this means Afterpay Touch’s shares are changing hands at 86x FY 2019 earnings and 34x FY 2020 earnings.
Although this is a premium to the market average, I think this is reasonable value given its current growth profile.
However, I feel it is important to note that its current valuation has already factored in quite a bit of success in the U.S. market. This means that failure in the U.S. would almost certainly lead to its shares plunging lower, making it a high risk investment.
For my risk profile the current risk/reward on offer is more than sufficient, which in my eyes makes it a great option along with fintech stars Bravura Solutions Ltd (ASX: BVS) and Xero Limited (ASX: XRO). But those with a lower tolerance for risk might want to look elsewhere.
These four shares, for example, could be great options for investors with a lower tolerance for risk.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO, Bravura Solutions Ltd, and Xero. 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.