Among the sea of red in the market is another disappointing day for the Afterpay Touch Group Ltd (ASX: APT) share price, which is down 4%.
There are few shares to have gone up and then down so much in six months. Despite roughly doubling over the past half year, it had gone up 267% by August and it has fallen 44% since then.
Afterpay’s huge rise was partly driven by strong revenue growth – it grew revenue by 390% in FY18 – but I think even more of it was down to its expansion of services.
The buy now, pay later provider can now count nearly every major retailer in Australia as its client now. Some of the most recent wins include Best & Less, Mitre 10, Chemist Warehouse and Barbeques Galore.
What was particularly exciting was the expansion into the US and the UK. It has signed over 800 US retailer contracts with 150,000 registered US customers. Australia only has a population of around 25 million, but the US population is over 325 million. A much bigger opportunity
Afterpay acquired 90% of Clearpay, a UK buy now pay later business. It will be a few months before Afterpay UK is launched, but as the third biggest e-commerce market it represents a good opportunity.
Afterpay has also increased its Australian warehouse facility to $500 million by completing a $200 million facility with Citi.
There’s no arguing that what Afterpay has achieved is impressive. It has taken Australia by storm and now looks set to do well overseas.
But, its valuation probably got too far ahead of itself. A particular worry is the newly-announced senate inquiry into other finance businesses like payday lenders. I actually believe Afterpay has a solid defence – it is different to its competitors. It’s one of the least likely businesses to be affected.
However, it still doesn’t look cheap trading at 56x FY20’s estimated earnings. Afterpay seems exciting, but I’d rather wait to see that its Australian operations aren’t regulated before investing. Plus, well-financed competitors could come out of the woodwork.
However, this beaten-down tech share does look very good value considering how fast it’s growing revenue and profit, yet it’s now trading with a PEG ratio of less than 1.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.