Is the Afterpay share price a buy?

With the Afterpay Touch Group Ltd (ASX: APT) share price falling by 36% since the August high, it’s worth considering if Afterpay is a buy.

I’m happy to buy a bargain when there’s an opportunity to buy a growth share at a cheaper price.

But, Afterpay still isn’t exactly cheap trading at 100x FY20’s estimated earnings. The 100+ p/e ratio club is not normally viable over the long-term – either earnings grow or the share price falls. There is a lot of success still baked into the price.

Afterpay is generating excellent growth. In FY18 Afterpay’s revenue grew by 302%, which is fantastic for any business. The result was mostly driven by Australian customers, imagine how good the next few years could be if it can achieve the same sort of growth in the US.

Indeed, Afterpay said that it has made more progress in six months in the US than it did in two years in Australia. Management also estimated that a few months ago the total addressable GMV of just the US retailers it was live with at the time was greater than the total online apparel market in Australia.

It’s unlikely that Afterpay can take much more market share of online apparel in Australia. However, I do like that it is expanding into other industries that could benefit from Afterpay’s payment model.

For example, in the health sector it has recently expanded into dentistry and optometry. In the dental sector it has agreements with Primary Dental, Maven Dental, Pacific Smiles Group Ltd (ASX: PSQ) and Totally Smiles. In the optometry industry Afterpay is working with OPSM, Bailey Nelson and The Optical Co. There are many other health sectors that could benefit.

In the longer-term we could also see the UK become another major source of earnings for the company. There could be additional markets to enter after that, like Canada.

Foolish takeaway

The upcoming Senate inquiry is a worry, but it seems to me that Afterpay offers a fundamentally different model because it doesn’t charge fees or interest if the customer pays on time. The inquiry could be a net positive if competitors are forced to change.

However, despite the potential growth, Afterpay is still trading too expensively for me to consider buying shares – it isn’t even making a bottom line profit yet. I think there are better valued growth shares on the ASX at the moment.

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.

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