The Afterpay Touch Group Ltd (ASX: APT) share price rose 7%, meaning its has broken its all-time share price record, ending the day at $22.39, although it was slightly higher earlier in the day.
There hasn't actually been any official news out of the buy now, pay later provider since the company reported its half-year figures to investors at the end of February 2019 during reporting season.
However, last week my Fool colleague Tom Richardson mused that traders might send the Afterpay share price higher today and he was proved right.
Momentum investing is an interesting type of investing. It somewhat goes against what sane investment advice looks like – choose your entry price carefully, get the right value and don't follow the herd. Yet, a business that is doing well economically will see its share price rise over time. So, at the same time, it can make sense how momentum investing does actually work, at least until it reaches an astronomical valuation.
There is also the potential of an Afterpay market update in the next couple of weeks, considering one was released around this time a year ago as a third quarter update – as my Foolish colleague pointed out here.
There are varying cases for and against Afterpay. Some believe that its model is about building up a portfolio of risky customers that may end up defaulting if Australia goes through a recession, although Afterpay points out that its late fees are becoming a smaller part of its earnings.
Others, the optimists for Afterpay, believe the company is set to change the face of retail in the US as well after conquering Australia. David Allingham, a portfolio manager from Eley Griffiths, thinks the company could be looking at gross merchandise volume (GMV) of $25 billion by FY22, with the US segment making up $20 billion if it goes well.
Foolish takeaway
Looking into the distance, Afterpay is trading at 82x FY21's estimated earnings. This valuation does seem very high, but that's partly because the company is going through the set-up phase in the US and is about to do the same thing in the UK.
Assuming everything goes according to plan, its earnings in FY23 could look much healthier, but it is priced today for a lot of growth between now and then. Afterpay shares could easily reach $30 or drop to $15 over the next year or two (perhaps both?).
