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Is the Afterpay Touch Group Ltd (ASX:APT) share price a buy?

The Afterpay Touch Group Ltd (ASX: APT) share price has been one of the best performers on the market over the past year, rising an astonishing 268% over the past year. Just like other tech shares such as Altium Limited (ASX: ALU) and WiseTech Global Ltd (ASX: WTC), Afterpay now has a very optimistic valuation.

Many experienced and qualified market commentators have said that Afterpay is now far too overvalued. Its current valuation reflects a sizeable amount of revenue from every Australian, or good success with its overseas growth plans.

As a reminder, Afterpay achieved group earnings before interest, tax, depreciation and amortisation (EBITDA) growth, excluding ‘significant items’, of 468% to $33.8 million.

Afterpay underlying sales were up 289% to $2.18 billion and Afterpay’s revenue and other income rose 302% to $116.8 million.

The top line performance of Afterpay was truly a strong result. Even more useful was the net transaction margin of underlying sales increasing to 2.6% from 2.5% in the previous year.

One of the main concerns surrounding the Afterpay model is that its customers could be risky and may not be reliable. In FY18 Afterpay net transaction losses reduced to 0.4% of underlying sales, compared to 0.6% in FY17.

Afterpay is a hard business to gauge, but some estimates put Afterpay’s valuation at 118x FY18’s estimated earnings and 62x FY20’s estimated result. This is a huge valuation whatever way you look at it.

It’s hard to judge what the right price to pay for this type of business is. It is generating actual revenue and strong growth, who knows how big it will be in five years?

In July it achieved $20 million underlying merchant sales in the US compared to $12 million in June. If it keeps growing at this rate it could become a major retail force in the US in a year from now. Indeed, the CEO of Urban Outfitters was very pleased with progress.

Afterpay recently raised $117 million from institutional investors at $17.05 per share to fund future growth in the US and soon the UK. Asos Australia is one of the newest clients onto the platform and this could be a key client for expanding into the UK market.

Is it a buy?

Over the next 18 months Afterpay could easily fall or rise 25% due to its valuation but also its growth achievements.

Afterpay ticks a lot of the boxes that growth-focused US Fool founder David Gardner would go for. If you’re investing for the long-term and can stomach large price falls then Afterpay could still be a good bet on a five year and beyond view.

However, I’m not personally investing as debt and debt-related type businesses could face difficulties due to rising interest rates. I’m happy to own it indirectly through funds I’m invested in though.

Instead, I’d rather buy one of these top shares for my portfolio that are trading at much more attractive value.

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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and WiseTech Global. 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.

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