Should you buy Afterpay Touch Group or Zip Co at current share prices?

Afterpay Touch Group Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are starting to provide challenges to many established institutions as they look to penetrate the payments market. Should you buy?

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Payment methods have evolved over time and smartphones have helped provide a platform for digital disruption in this space.

Companies like Afterpay Touch Group Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) are starting to provide challenges to many established institutions as they look to penetrate the payments market.  Let's take a look at whether you should consider adding either of these companies to your portfolio.

Afterpay Touch Group

Afterpay Touch Group is a technology-driven payments company that offers a 'buy now, receive now, pay later' service that does not require end-customers to enter a traditional loan or pay any upfront fees or interest to Afterpay.

The Afterpay share price was $2.95 when it listed on the ASX in June 2017 and has increased by ~500% to sit just under $17.44 per share.  It started CY2019 at $12 per share and the impressive charge was on the back of positive investor sentiment heading into results season.

Expansion is a driving factor behind the share price rise, with investors well aware of the lucrative returns if Afterpay can successfully penetrate the US and UK retail markets.  Afterpay currently has 2.5 million subscribers and more than 20,000 retail partners and this is being interpreted as just scratching the surface.

Looking at some key financial metrics, Afterpay is not yet turning a profit but is expected to be generating 25.9c in earnings per share by FY2021.  The current Price to Sales ratio is at 35.6, in comparison to the sector average of 4.4.  Its debt to equity ratio is ~88%.

Zip Co Ltd

Similar to Afterpay, Zip Co Ltd offers point-of-sale credit and digital payment services to consumers and merchants.

The Zip Co share price was $0.65 when it listed on the ASX in December 2017 and has increased by ~110% at $1.28 per share.  It started CY2019 at $1.06 per share and it has also enjoyed a 20% increase to start the new calendar year.

12,600 retail partners are currently using Zip Co and it continues to grow, continuing to tie up some big-name businesses like Chemist Warehouse and Bunnings.  The CEO recently announced that the company was experiencing record growth across all key metrics including customer engagement, transactions, in-store volume, revenue and bad debts.

Looking closer at financial metrics, it currently has negative earnings per share but has a reasonable Price to Sales ratio of ~10.  The Debt/Equity ratio is ~868%.

Foolish Takeaway

It is clear to see the investors are highly optimistic about both of these digital payments companies.  Both are experiencing substantial growth and this can be seen in the share price, with a lot of that growth already factored in.

Afterpay is certainly getting more limelight than Zip Co and is slightly ahead in catching retailers and consumers.  The question remains at whether this is an easy concept to replicate and whether any NASDAQ giants try to get a piece of the pie on offer.

High debts and further regulation are risks the companies face but if you're willing to be patient then it might be worth-while to buy a small parcel in one of them.

Motley Fool contributor Michael Guinery 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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