Investors stalking Afterpay Touch Group Ltd (ASX: APT) know all about the brokers who are labelling it a buy, with its astronomical share price gains over the last 12 months difficult to ignore.
But if you abide by the age-old “buy on a low, sell on a high” mentality – isn’t it time to take some profits in case the good times don’t last?
If the drop in Afterpay’s share price today is anything to go by you’d likely think yes – and at least getting part of your holdings off the bandwagon before the price drops any further might seem prudent.
Afterpay shares are down almost 8% at the time of writing to $16.29, and while I concede that is a long way off its share price point of $4.34 this time last year, it’s also a fair way down from its late August 52-week high of $21.13.
Can the good times keep rolling for Afterpay or should you take a more modest approach to your holdings and make money while the sun still shines?
With no news out of the company today, Afterpay’s share price drop could be attributable to a number of recent factors.
On October 2 Afterpay announced it would sell off its European e-services business for $7.5 million after entering into a deal with Nelumbo Limited, with a completion date for the hand-off of December 2 this year.
The sale comes after Afterpay reviewed its European segment back in July with the $7.5 million to be payable in two tranches, with $4 million paid on completion and $3.5 million within six months of the completion date.
Soon after this sale news investors caught wind of US-based payment platform player Square Installments – a formidable competitor in a space Afterpay had quite enjoyed monopolising.
With Square Installments already rolled out across 22 US states, Afterpay investors are no doubt concerned about the risk this will pose in terms of competition, but Goldman Sachs is confident enough in Afterpay right now to maintain its buy rating, so that’s one comforting fact.
But let’s not underestimate the potential threat of the likes of Zip Co Ltd (ASX: Z1P), with Zip announcing it had partnered with Virgin Australia back in August to allow customers to use the layby-style platform when booking flights.
But is the travel industry a dangerous companion for Zip if ASIC gets its way and closes the loophole in the National Credit Code allowing non-traditional lenders like Afterpay and Zip to exist at all?
Probably, but Afterpay itself is treading on shaky ground with its own foray into the beauty and entertainment space, with recent news it had also launched its services in the dental market.
However, If Zip makes big out of its partnerships with the likes of Wesfarmers Ltd (ASX: WES) and Super Retail Group Ltd (ASX: SUL), things could explode for the emerging player, posing yet another threat to Afterpay.
Afterpay’s growth has certainly been impressive in the last 12 months, but big growth often leads into a period of correction, and investors with skin in the Afterpay game should play their hand prudently for now.
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Motley Fool contributor Carin Pickworth has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO and Super Retail Group 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.