The Afterpay Touch Group Ltd (ASX: APT) share price could be one to watch as more competitors spring up and list onto the share market.
One of the main things that investors need to consider about a business is its ‘moat’. That doesn’t mean building a physical puddle around headquarters, it refers to the company’s ability to fend off competition.
The more growth and profit a business is creating, the more that competitors will want a slice of that profit margin. How well a business can cope under pressure will show whether it truly has/had a moat or not.
Afterpay may soon have its time of reckoning. Zip Co Ltd (ASX: Z1P) has been doing well in Australia, but Afterpay’s main focus is the gigantic US market. It’s in the US where new competitors are popping up.
Indeed, Sezzle, a Minneapolis-based business, has actually based its operating model on how Afterpay does things. QuadPay is another name to keep a watchful eye on.
Afterpay’s CEO Nick Molnar is unfazed by the prospect of competition according to comments reported in the AFR.
Mr Molnar believes that the growth of the buy now, pay later business will be a net benefit for Afterpay as it could encourage more retailers to sign up to the system. The AFR also reported he expects large banks to start offering instalment products, but Afterpay has first-mover advantage.
I believe that, aside from the ‘new’ innovative way to pay for retail items, a key attraction for Afterpay customers is the brand power. Customers know they can shop at a wide range of locations and everyone has heard of Afterpay, whereas its competitors are relatively unknown at this stage.
Afterpay is currently trading at close to its all-time high, so it’s certainly not cheap at the moment. But if it’s successful with its US and UK expansion plans then it may well be very good value today. However, competition could dampen growth if they resonate with customers.
That’s why I would rather invest in one of these quality, profitable ASX shares instead of Afterpay at today’s prices.
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Motley Fool contributor Tristan Harrison 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.