The Afterpay Touch Group Ltd (ASX: APT) share price fell heavily last week after the company pulled a full 180 degrees on ASX investors.
The company first announced a strongly supported capital raising of $317.2 million at $23.00 per share. The proceeds would be used to support Afterpay’s global growth strategy in the United States (US) and the United Kingdom (UK).
Concurrent with the placement, three Afterpay founders/executives offloaded a collective 4.5 million (or $103.5 million) of shares. Capital raisings that are used to fuel growth are generally perceived in a positive light. When the trading halt was lifted, Afterpay shares soared on the back of the company’s ambitious goal of reaching $20 billion underlying sales by 2022.
The day following the capital raising and executive sell-down, the company announced that the Australian Transaction Reports and Analysis Centre (AUSTRAC), the regulator responsible for anti-money laundering/counter terrorism financing (AML/CTF) would require Afterpay to appoint an external auditor to carry out an audit with respect of its AML/CTF compliance. The news caused Afterpay shares to fall 8.5% on the day, pulling capital raising participants underwater.
Why I would avoid Afterpay shares in the short-term
Sentiment is vital for sustaining a bullish share price, especially in the context of a high valuation. The eerie timing of Afterpay’s executive sell down and capital raise, along with AUSTRAC’s investigation creates a lot of uncertainty and mistrust. I believe investors should avoid Afterpay shares in the short-term but watch closely from the side-lines as more news unravels.
Long-term picture is clear, but patience is key
Overall, I believe this is a small graze to the bigger picture. A buying opportunity will emerge once the negative sentiment subsides and investors have a better understanding of the AUSTRAC investigation.
Afterpay is still by far one of the best growth stories on the ASX. In 2019, the company posted a total of $4.7 billion in underlying sales/gross merchandise value (GMV), or a 143% increase on the prior period. The capital raising is simply fuel for the company’s mid-term strategy of achieving $20 billion GMV by 2022.
The company continues to kick goals in the US, generating approximately A$1.7 billion in annualised GMV within 13 months of operations. By comparison, it took the Australian business approximately 3 years to achieve the same level of underlying sales.
All great growth stories come with their own short-term weaknesses. The Afterpay share price might tread lower or sideways in the coming weeks or months but certainly deserves a place on your watchlist.
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Motley Fool contributor Lina Lim 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.