Is the Afterpay Touch Group Ltd (ASX: APT) share price a buy?
I think that's a good question now that the US Federal Reserve has increased the interest rate yet again.
Despite being down 44% since 27 August 2018, it is still up 90% in 2018 – making it one of the best performers.
Rising US interest rates means that the valuations of all shares will be scrutinised just a little bit more. Afterpay is currently trading at around 88x FY20's estimated earnings. This seems like a very expensive price. It is a very expensive price considering the All Ordinaries is trading at a fraction of the multiple of earnings.
The haters of Afterpay say that it offers nothing special, it's building a 'loan book' of people that may not repay their debt if the economy runs into trouble and that its valuation is pricing in too much success. A competitor could come in and change everything.
In defence of Afterpay, approximately 95% of payments received in FY18 did not attract a late fee.
A couple of fund managers have mentioned that retailers are starting to complain about how much they are paying to Afterpay. But, that particular point misses the fact that Afterpay is supposedly helping those retailers boost sales.
On the flipside, Afterpay is generating genuinely enormous growth. In FY18 Afterpay reported underlying sales grew by 289% to $2.18 billion, it also reported that Afterpay's revenue and other income increased by 302% to $116.8 million.
If Afterpay can keep growing revenue by more than 200% a year then the current valuation could appear cheap very quickly! Looking further ahead, Morningstar analysts have pencilled in earnings per share (EPS) of 25.1 cents, suggesting that it's trading at 47x FY21's earnings. That's still pretty expensive.
The huge US market will be key. Afterpay said that over 10% of the Australian purchasing population use the Afterpay service and the company processes over 10% of Australian online commerce. If it can reach 5% of the US purchasing population will be generating much more revenue than today.
In the US, Afterpay is live with over 1,150 retailers and has already garnered over 450,000 US based customers.
Is the Afterpay share price a buy?
I'm not personally buying shares of Afterpay at the current prices – I believe it's trading too expensively and therefore may underperform the market over the shorter-term. But, there are other ASX shares out there that could beat the market.
