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Here’s why Afterpay can really dominate

Everyone’s favourite roller coaster at the ASX theme park – Afterpay Touch Group Ltd (ASX: APT) has again been making waves this week. After languishing at around the $22.30-mark mid-week, Afterpay shares spiked on Thursday to over $25 after the company reported that it had passed the 1.5 million customer mark in the US after just one year in the market.

It also reported that it has managed to bag more iconic brands such as Levi’s and Ray-Bans that join its swelling stable. With its pending launch in the UK and Afterpay’s proclamation that 1-in-4 Australian ‘millennials’ are using its service, things are certainly ‘coming up Afterpay’.

Of course, Afterpay is also one of the most notoriously ‘frothy’ stocks in the WAAAX family and on the ASX. The company has yet to earn itself a P/E ratio and its shares have doubled YTD –meaning (in my opinion) that the market is taking the world that Afterpay is promising with both hands. I understand why – if Afterpay can keep these ridiculous growth numbers coming, its $5.7 billion market cap starts to look very conservative indeed. For perspective, US payment giants MasterCard, Visa and PayPal have market caps of (US) $260 billion, $365 billion and $131 billion respectively, so there is a lot of blue sky up there.

Is Afterpay your typical growth stock?

Here’s why Afterpay is so powerful as an idea, a company, and an investment. Afterpay’s principle service of Buy-Now, Pay-Later is a service that consumers love in good times but will flock to in bad times. By allowing users to buy more with less money, it imparts a perception of enhanced wealth. When economic times are good, people will buy more because they feel richer, without actually being richer. But if a recession hits and tough times set in, users will be even more inclined to stagger large payments of essential goods and services, the things we can’t live without – maybe the new fridge or going to the dentist. This ‘all-weather’ aspect of Afterpay’s business model maybe the real ‘gold in them hills’ for the stock and might prove it’s not just another ‘growth stock’ that gets pummelled in tough times.

Foolish Takeaway

Although this ‘defensive’ layer of Afterpay is very auspicious for the business, it should not be a consideration in buying Afterpay shares at today’s prices. At current levels, there is nothing defensive about Afterpay shares and if there was a stock market crash anytime soon, I personally would expect Afterpay shares to be hit hard. But earnings… that may be a different story.

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Motley Fool contributor Sebastian Bowen 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.

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