Afterpay Touch Group Ltd (ASX: APT) was the undisputed darling of the ASX in 2018, with its share price rising over 250% between January and August. But can Afterpay successfully transform from rising star to an ASX blue-chip dividend stock in the future?
Afterpay's business model is a true innovation, as it is the retailers which make up the bulk of Afterpay's revenue, rather than the consumer. This is charged through a retailer levy on the payment made through Afterpay when a consumer uses it to purchase a product, rather than the consumer paying interest. Afterpay also restricts the accounts of users who don't make their repayments, while rewarding those that do with higher limits.
This concept quickly gained a large foothold in the payments space in Australia, with over 20,000 shopfronts now offering the company's services and Afterpay is now expanding into the (much larger) US market. Progress has been extremely positive, with Afterpay reporting over one million active users (as of this month) after only 11 months of US operations.
My main concern with Afterpay is how durable its competitive advantage will be into the future. The payments industry is a highly competitive game, with technological innovation driving rapid changes in how consumers pay and receive money. With stocks like Splitit Ltd (ASX: SPT) and Zip Co Ltd (ASX: Z1P) seeing local success, the field is getting pretty crowded and highly profitable US giants Mastercard, Visa and PayPal could shake things up at any time.
'Traditional' banks such as Westpac Banking Corp (ASX: WBC) have rewarded shareholders handsomely over the last two decades, both with capital growth and healthy dividends. But the foundation of this success has been cash flow. Despite decreasing its losses by 32% year-on-year, Afterpay remains cash flow negative. However, the numbers don't lie and Afterpay seems to be successfully strengthening its brand in the US and around the world (it will launch in the UK later this year). If Afterpay can cement its impressive growth numbers with positive cash flow, there is no doubt it can continue to reward shareholders.
Foolish Takeaway
Afterpay is still an investment that carries a lot of risk. The company is not yet profitable and has never been tested by a recession. The foundation of a 'blue-chip' stock is consistent and rising positive free cash flow over multiple years and Afterpay is still not there (despite its losses shrinking). So while I think it has the potential, I would have to see a positive and lasting trend in cash flow before being certain Afterpay has what it takes to be an ASX blue-chip of tomorrow.
If Afterpay hasn't got you convinced, check out these Top 3 ASX blue-chip stocks of today instead.
