Why the Afterpay Touch Group Ltd (ASX:APT) share price skyrocketed last week

Last week was a good week for shareholders of Afterpay Touch Group Ltd (ASX: APT), after the share price of the buy now, pay later fintech surged almost 30% higher. But they have had to endure a rollicking few months in which Afterpay shares reached a new record high and then shed over half their value in a savage selloff.

For a long while there it seemed like the company could do no wrong – exploding customer numbers at home, as well as talks of international expansions into the lucrative US and UK markets, pushed its share price to an all-time high of $23 by late August. At that time its share price had surged close to 300% since the beginning of 2018.

But then came a period of intense volatility in global equities markets which hit tech growth stocks especially hard. Overseas, US tech giants like Apple, Amazon, Tesla, Netflix and Alphabet Inc., the parent company of Google, all posted heavy losses. And the contagion spread to Australian markets: the share prices of local market darlings Appen Ltd (ASX: APX), Nextdc Ltd (ASX: NXT) and Altium Limited (ASX: ALU) were all hammered throughout October. But it may have been Afterpay that was worst affected by the local rout of tech stocks – from August 24, when it hit that high of $23, to November 21, its share price plummeted more than 50% and it looked on track to set a new 52-week low.

The problem for Afterpay was twofold. Not only was its share price victim to the general sell-off of global equities, but the company also found itself fighting off threats from regulators at home. After a string of negative publicity concerning the impact that Afterpay and fellow buy now, pay later moneylender Zip Co Ltd (ASX: Z1P) were having on millennials’ debt levels, ASIC announced it was conducting a review into the sector and was considering imposing stricter regulations.

But shareholders breathed a collective sigh of relief this week. ASIC released its report on Wednesday, and despite noting that Australian customers now owe over $900 million in debt to buy now, pay later lenders, it did not recommend bringing the sector under the credit act. This means that Afterpay and Zip will not have to abide by some of the more onerous responsible lending requirements imposed on typical lenders – such as thorough background credit checks – and can continue to approve customers’ purchases instantly.

Adding to this positive momentum was some good news from the US. Celebrity Kim Kardashian promoted Afterpay’s payment platform to her 120 million Instagram followers, encouraging them to use Afterpay when purchasing her products online. This could give Afterpay’s plans to succeed in the US a significant boost.

It had already released a promising update on its US operations to the market earlier in November. In it, Afterpay reported that over $115 million worth of underlying sales already having been processed through the platform since its launch back in May. Plus partnership agreements had been reached with big name American brands including Steve Madden, Skechers, and Urban Outfitters.

Foolish takeaway:

The biggest risk still lurking on the horizon for Afterpay is a Senate inquiry focussing on financial services companies that previously escaped the scrutiny of the Banking Royal Commission. After seeing the damage that did to the reputations of Australia’s major banks, shareholders may be apprehensive about what the inquiry might turn up about Afterpay.

And there could still be bumpy times ahead. Global markets are still incredibly volatile, and growth stocks tend to experience the wildest swings.

If you’re a shareholder in Afterpay you’ll be feeling pretty happy after the last week – and positive developments in the US should also have you feeling pretty bullish about the longer-term outlook. But there might still be some short-term surprises along the way, so hold onto your hats.

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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO and Altium. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and Appen Ltd. 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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