Shares in Afterpay Touch Group Ltd (ASX: APT) are down 5.8% to $15.07 in trade today and down from highs above $20 at the end of August as some of the wild investor enthusiasm for the business recedes.
Also adding pressure to the share price is an article in today's Australian Financial Review suggesting that Afterpay has shifted around the timing of provisions between financial years to give the impression that EBITDA grew more strongly in FY 2018 than it otherwise might have done.
The shifting of a provision according to the AFR was related to the Touchcorp business AfterPay acquired back in 2017, with many ASX small-cap enthusiasts only having AfterPay on their radar as a result of following Touchcorp. In fact it was a business that was widely considered to have more potential back in 2016.
I for one made a catastrophic blunder in not fully considering the potential of the combined businesses as stock in the merged group went on to go absolutely gangbusters.
Even after today's share price falls, AfterPay has a market value of more than $3.6 billion after posting a loss of $7.6 million on revenue of $116.8 million for financial year 2018.
It also reported earnings before tax, depreciation, and amortisation (excluding significant items) of $27.7 million, with the AFR article claiming this amount would be lower if Afterpay had not shifted around the timing of provisions related to the Touchcorp business.
Afterpay did launch its U.S. business in May 2018, with underlying retail sales hitting $20 million by July in an auspicious start, but the US remains a complex market that will stretch the resources of AfterPay to its limits.
It has also announced a deal to acquire a UK-based doppelgänger ClearPay Finance in exchange for 1 million Afterpay shares, while raising $117 million from institutional investors at $17.05 a share.
AfterPay seems a great business, with excellent management and faultless execution so far, but I struggle to understand the valuation on more than 30x trailing revenue even with the group's potential expansion into the UK and U.S.
After all this is a 'buy now, pay later' business with no real competitive advantage in offering interest free credit, rather than a software-as-a-service business boasting attractive economics and compound growth potential for example.
Notably some of its best technology around payments processing and point of sale financing came it to via the Touchcorp acquisition.
AfterPay may keep growing nicely on the back of its popularity with retailers and millennials, but its success is likely to attract more competition going forward.
As such you can count me out as a buyer of AfterPay touch shares, as in the expensive tech share space I think you're far better off looking at software businesses that boast higher gross profit margins and more attractive economics.