Over the coming week, I’ll be exploring, in a three-part series, why I think the Afterpay Touch Group Ltd (ASX: APT) share price is a buy.
Afterpay is currently one of the most polarising stocks on the ASX. On the one hand, you have the bulls calling it the next PayPal with global domination within sights. And on the other hand, you have the value investors, pointing out what they would call an absurd 3-billion-dollar market cap for a company that only produced approximately $100 million of revenue in its latest financial year result. That’s an approximately 30x price-to-sales multiple. Ahem… yes, I said price-to-sales, not price-to-earnings. Let’s just say this is not your typical value investor’s stock.
I think both sides have their merits, but if I am to look at the potential returns on offer if Afterpay does go on to dominate the “buy now, pay later” space, versus the potential loss on investment if they don’t, then to me, the upside far outweighs the down. It is this sort of asymmetric return profile that is very attractive.
This is not the type of investment for everyone though. Before making an investment in Afterpay, you should understand that there is a genuine risk that you could lose a large sum of your money if they cannot execute the global rollout of their platform. But does Afterpay deserve a low weighting in a well-diversified equity portfolio? I think yes.
I have followed this company for a long time and the one thing that held me back from an investment at an earlier point in time was the inability for me to comprehend, and articulate, their competitive advantage. I believed the concept was a great one, that provided great value to their customers, but I could not understand what was stopping competitors’ coming in and offering the exact same thing.
One thing I have learned over my investment journey is that the market doesn’t care about your personal belief about whether a company has a strong competitive advantage or not. If the product is resonating with customers on mass, then whether I personally believe in the product or not, is irrelevant. It can be hard to go against your own beliefs when investing, but if you are unable to put your own beliefs aside and recognise a product that has clear customer approval then you can miss out on some great investing opportunities.
A couple of examples of this for me was not originally investing in A2 Milk Company Ltd (ASX: A2M) or Blackmores Limited (ASX: BKL) because I personally didn’t believe in their IP or claimed health benefits. This has prevented me from gains of 1200% and 600%, respectively. Whether I personally believed in the health benefits of only A2 proteins in milk products or not is irrelevant to how many cartons of milk, or tins of infant formula they sell. The real question is, do the majority of customers in their target market believe in the product? And in the case of A2 and Blackmores, their share price gains show that the answer is a profound yes.
I have learned from these two examples that if there is clear momentum in demand for a company’s product, which definitely has been the case for Afterpay, then I have to put my own beliefs aside, in order to assess the company as a potential investment.
Motley Fool contributor Jacob Ballard owns shares of AFTERPAY T FPO and Blackmores Limited. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia owns shares of A2 Milk and 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.