Fund manager Andrew Mitchell from Ophir Asset Management has outlined why he likes Afterpay Touch Group Ltd (ASX: APT).
The buy now, pay later business has seen its share price fall by a third since the all-time high near the end of reporting season last August due to a price/earnings de-rating of higher growth businesses.
Mr Mitchell wrote a piece for Livewire outlining why Afterpay could still be an excellent share to own despite already rising significantly over the past couple of years.
He pointed to retailers' willingness to embrace a service that allows customers to be flexible with their payments as a way to attract custom. Afterpay has proven to increase transaction sales volumes and average ticket sizes.
At the time of listing in March 2016 Afterpay had 100 retail merchants and 38,000 end-customers. Afterpay now has over 2.5 million customers and has 20,000 separate retail partners, processing more than 10% of all transactions on Australian retail sites.
Mr Mitchell said that the US rollout of Afterpay has been impressive with 450,000 end-customers, including 19,000 that registered for Afterpay over the Black Friday online sales event.
The most encouraging thing to him has been that the monthly rate of growth in customer-sign-ups has been higher than the experience in Australia, with minimal execution issues. Apparently Afterpay has been asking 'millennials' to contact their favourite retail brands on social media to "Please add #Afterpay".
Chloe and Kim Kardashian have recently added Afterpay to their retail brand offerings, which was a useful bonus.
Other pieces of Afterpay retail take-up that Mr Mitchell shared was the US head of e-commerce for apparel retailer Cotton On recently said 20% of their buyers were already utilising the service.
The US market is 20x the size of the Australian opportunity. US online fashion alone accounts for US$60 billion in purchases a year.
In summary, Mr Mitchell said "We continue to like the business and continue to be excited to be a part of the growth trajectory from here."
Foolish takeaway
Afterpay does have excellent potential, but it's not risk-free. Competitors could come along to offer the same service, legislators could throw a spanner in the works, or repayments by customers may worsen in a downturn.
It's currently trading at 105x FY20's estimated earnings, so it's not your typical value stock. Afterpay is not currently high on my watchlist based due to its valuation.
