Why I think the Afterpay share price still has plenty of room to grow

The back-end of 2018 was an uncertain time for the  Afterpay Touch Group Ltd (ASX: APT) share price. The buy now, pay later sector was being closely scrutinised by ASIC and a Senate inquiry was underway – plus several media reports were critical of Afterpay’s business model because they saw it as enabling millennials’ bad spending habits. This all conspired to take some of the sheen off this former market darling.

But jump forward a few months and things are looking a lot rosier for Afterpay. The ASIC investigation came and went without imposing any notable additional regulatory burden on the sector, and then in late February the Senate committee finally released its report. The big concern for shareholders was that the report would recommend that Afterpay, as well as competitors like Zip Co Ltd (ASX: Z1P) and US-based newcomer Splitit Ltd (ASX: SPT), be forced to abide by the National Credit Act. This would require them to conduct onerous responsible lending checks, essentially breaking their business model of supplying instant credit to their customers.

And although the report did make 20 separate recommendations to more stringently regulate the industry, adding these small credit providers to the National Credit Act was not one of them.

The news lifted a huge weight off the sector. Since the Senate report was released on the evening of February 22, shares in Afterpay have shot up close to 20%, while Zip is up over 10% and Splitit has surged an unbelievable 115%. At $20.87, shares in Afterpay look increasingly likely to threaten the 52-week high of $23 they hit back in August of 2018.

And it’s really no wonder the share price has rallied so strongly. With the threat from the regulators a thing of the past, investors are able to concentrate on Afterpay’s underlying performance, which is undoubtedly impressive.

During the first half of FY19, Afterpay grew its customer base by 118% versus first half FY18 to over 3.1 million. Total income grew by 91% to $116 million, despite late fee income falling from 22.5% of statutory income to 17.5%. This is good news for shareholders as well as the industry at large, as it is a measure of the ability to generate revenue growth into the future. A larger proportion of income from late fees means that the company is relying too heavily on its customers failing to repay their loans, which obviously isn’t a sustainable source of income. Falling late fees does a great deal to boost the integrity of the industry at large, silencing some of the critics who feel that the buy now, pay later industry exploits millennial fast fashion consumer culture.

Should you invest in Afterpay shares?

With the regulatory threat now relaxed, recommending an investment in Afterpay has become much easier. However, with the price at the top-end of its 52-week price range, there is a possibility that shares in the company are overbought. Despite its recent troubles, the Afterpay share price is still up over 90% since late November. So there is always the potential for it to run out of steam.

I rate Afterpay as a great long-term buy and hold investment. It is proving popular with consumers and is doing much better than its competitors at building awareness of its brand – it was even recommended by American celebrity Kim Kardashian on her Instagram page.

As its international expansions into the US and UK continue to gather momentum, I would expect to see the Afterpay share price climb. However, it is notoriously volatile, even when things are going well, so brace yourself for a fun – but possibly wild – ride.

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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO. 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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