Motley Fool Australia

Why the Afterpay share price has surged 55% so far this year

ASX growth shares 2019

The Afterpay Touch Group Ltd (ASX: APT) share price closed 1.14% higher today which means the Aussie fintech surged 8.22% for the week.

With no new news out since its business developments update on 18 January, it looks like a combination of factors that have continued to push Afterpay’s share price momentum throughout January and February.

After news of a Senate inquiry into the “buy now, pay later” services industry was announced in October 2018 – intended as a catch-all for those financials groups not within the limited scope of the Royal Commission – Afterpay’s share price sank.

The stock rose as high as $21.13 per share in late August but slid to close out the year at $12.40 per share –  still netting investors a tidy 94% return for the year.

But the tides have turned and Afterpay has quickly risen more than 50% year-to-date. There are a few reasons for this change of fortunes and the big test will be Afterpay’s earnings release on 26 February.

The S&P/ASX200 Index (ASX: XJO) is up over 9% for the year which has helped boost the majority of Aussie shares so far this year, and Afterpay is no exception.

Secondly, the Financial Services Royal Commission turned out to be less heavy-handed on the banks than expected. Commissioner Hayne’s final report made 76 recommendations, but many had already been enacted by the banks or had little financial implications for the banks (i.e. no structural separation measures). This has allayed market fears of a credit crunch from the banks subsequently shutting up shop and reducing consumer spending in the economy (which would, therefore, lower Afterpay’s sales volumes).

Finally, the Senate inquiry mentioned before turned out to be pretty good news for Afterpay. ASIC decided not to class Afterpay as a credit provider, which would, in turn, lead to much stricter Know Your Customer (KYC) compliance procedures which the company had argued would restrict its future growth prospects by slowing approval rates and undergoing costly compliance checks.

Foolish takeaway

For me, Afterpay is still trading far too high above its true valuations with investors pinning their hopes on aggressive expansions into the USA and Europe. The February results will be an interesting barometer of the company’s success so far, particularly given the shocking misses on both US and Aussie retail data that we’ve seen in the last week.

In the meantime, I’d rather look for some ASX shares like these that are higher yielding and more fundamentals-based.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Lachlan Hall 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.

Related Articles…