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Time to sell Afterpay Touch Group Ltd (ASX:APT)?

Source: Company presentation

You’d be forgiven for thinking you were at a tennis match if you spent last week watching the share price of Afterpay Touch Group Ltd (ASX: APT) swing from red to green to red again. On Monday, shares in the “buy now, pay later” fin-tech dropped almost 7%. Then on Tuesday, they recovered slightly, posting a 2% gain. On Wednesday, they plummeted 19%. But then on Thursday, they surged back up 14%. Finally, on Friday, they lost a further 3%.

Overall, a rollicking week ended with Afterpay down 15% and its shareholders reaching for the Dramamine. As of Friday afternoon, Afterpay shares were trading at $12.50. This is some way off the all-time high of $23 that the company’s shares hit back in August.

A combination of factors has contributed to the sharp decline in Afterpay’s share price. Over the last couple of weeks, the ASX had taken its lead from US markets, where there had been a major selloff of many overseas tech giants. Apple, Tesla, Amazon and Netflix all suffered heavy losses, and the global tech stock contagion spread to the Australian market.

During the week ending October 12, shares in many market darlings were hammered. WiseTech Global Ltd (ASX: WTC) dropped 13%, Appen Ltd (ASX: APX) was down 12%, ELMO Software Ltd (ASX: ELO) dropped 7%, and Nextdc Ltd (ASX: NXT) lost 4%.

But while most of these other stocks went on to post modest recoveries this week, Afterpay instead extended its losses.

So what really hurt Afterpay’s share price this week wasn’t so much trends in global markets as it was breaking news back home. On Wednesday, reports emerged of a proposed Senate inquiry into the “buy now, pay later” industry – a part of the finance sector occupied by Afterpay and its main competitor Zip Co Ltd (ASX: Z1P). Zip shares also ended the week down almost 9%.

Because of their non-typical lending model (they do not charge interest and only penalise customers through late fees) these companies managed to avoid scrutiny by the recent Banking Royal Commission. They have also managed to dodge some of the more onerous responsible lending requirements imposed on typical lenders – such as thorough background credit checks – and are instead able to approve customers’ purchases instantly.

Afterpay and Zip both released statements in an attempt to reassure investors following the news of the proposed inquiry being reported in the press. Both companies welcomed the review into the sector and stated that they were already working closely with ASIC to gain more regulatory certainty over their business activities. But both companies did go to great pains to stress how their business models were uniquely different from typical lenders.

Shareholders in Afterpay shouldn’t have been caught by surprise by this week’s events. It was really only a question of when. Reports that ASIC was considering reforming the sector had been circulating for months and had gained even more traction recently as many media outlets began criticising Afterpay as a service that enabled millennials’ impulsive and irresponsible spending habits.

So is it time to sell?

It’s difficult to say. There is already a review underway into the buy now, pay later industry by ASIC which is due to be released later this year. A Senate inquiry will put Afterpay’s practices under an even more powerful – and public – microscope.

But it will be difficult to stop the rise in popularity of Afterpay’s service. The company already claims 2.3 million customers and 17,000 merchants use its platform, and it is expanding into the lucrative US and UK markets.

Whether or not increased regulatory burden poses an existential threat to Afterpay remains to be seen. In the meantime, I’ll reluctantly hold onto my own shares in Afterpay – but I am bracing myself for more tumultuous times ahead.

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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO, WiseTech Global and ELMOSFTWRE FPO. The Motley Fool Australia owns shares of and has recommended ELMOSFTWRE FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, 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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