David Allingham, a portfolio manager from Eley Griffiths, believes there is still significant upside for the Afterpay Touch Group Ltd (ASX: APT) share price over the next three years, according to an article he shared with Livewire.
One of the main reasons he believes that is because the company has a gross merchandise value (GMV) target of $20 billion by FY22. This is an impressive target considering Afterpay only did $2.3 billion of GMV in the first half of FY19.
He also reminded us that management have a track record of exceeding expectations.
Mr Allingham said that Afterpay didn't break down its expectations of how much GMV each country will generate, but from the work Eley Griffiths has done it seems as though the target doesn't assume any contribution from the UK business.
The $20 billion GMV target could be understated, the US business alone could make $20 billion GMV by FY22 if things go well.
And the US business is going well. It's scaling faster than the Australian business did. It could add around 3.5 million customers in the US over the next year, with a huge market of still untapped customers.
The potential financials of Afterpay seem promising according to Mr Allingham.
He said Afterpay has guided a 2% net transaction margin (NTM) on the GMV, which implies a NTM of $500 million if you estimate the GMV to be $25 billion. Assuming around $150 million of corporate overheads, then that would imply profit before tax of $350 million or net profit after tax (NPAT) of $250 million. With a price/earnings ratio of between 30x to 40x, that would be a market cap of $7.5 billion to $10 billion or $30 to $40 per share.
Foolish takeaway
With improving margins and impressive management hiring, Afterpay is taking all the right steps for achieving its potential internationally. If Mr Allingham is right then Afterpay could deliver market-beating returns over the next three years. However, things could go wrong if competitors can slow down Afterpay's progress or a recession causes a ramp up in transaction losses.
