An ASX beginner's guide to Afterpay

There's a lot been written about Afterpay Touch Group Limited (ASX:ATP) and you may be keen to know more. Here's a run-down of the ASX favourite.

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A lot has been written about Afterpay Touch Group Limited (ASX:ATP) and you may be keen to know more. Afterpay is an Australian financial technology company that has developed a new payment system where customers (3.1 million on most recent 2019 figures) can make purchases via four equal payments every two weeks, but receive the goods or services immediately.

Afterpay listed on the ASX in 2017 with a share price in early July that year of $3.08 and those early birds that have hung on to them will be pleased with today's price at $28.45 (at the time of writing). I tend to consider my investment options in terms of how companies intersect with our everyday lives: who would use it? How do people use it, and why?

A closer look at Afterpay

Today I found myself in a coffee shop opposite a small hair salon in the suburbs of Brisbane. The salon looked like it was having a busy morning and for the record the clientele was young and female. There was also a very large "Now we have Afterpay" sign in the window. I decided to approach a staff member and check it out. Of course, this is very unscientific and highly anecdotal, but I learnt a few things from that small interaction.

  1. A few of the clientele that morning had used the service for higher value purchases. It's not unusual for salons to charge over $100 for certain services.
  2. They'd had customer requests to offer Afterpay as a payment option.
  3. Young people are the early adopters (no surprise there)
  4. The incremental payment model suits students and early career wage earners.
  5. It's all about instant gratification – pay a bit today, a bit more in two weeks and so on, but you can have the new haircut today.

In a way, it's similar having a credit card if you diligently pay off the balance to zero each month, except with Afterpay you get what is essentially an extra month to pay off your purchase before penalties apply.

How does Afterpay make money?

Retailers pay a service fee and there's another, smaller income stream of about 17% from defaulters via late payment fees. Each missed payment will cost $10 with an additional $7 per week if payment isn't made. Fortunately for consumers, late fees are capped at $68 per purchase. The company has also made some bold expansion steps into the United States (US) and the United Kingdom (UK), highlighting lots of early growth potential. After partnering with super cool US apparel retailer Urban Outfitters, among others, it was reported that US$11 million was processed by the Afterpay system in its first full month trading in the US back in June last year. In addition, just this month, Afterpay launched its UK operation after purchasing Clearpay and will trade in the UK under that name.

Why all the fuss?

One word: potential. Think in terms of the online payment system Paypal and the relatively short time it's taken to be a regular part of our lives as we shop online. Paypal's last close on the NASDAQ was at US$114.15. A year ago, you could have bought shares for US$80.67 and back in 2015 you could have jumped on the Paypal wagon early for US$34.69 per share.

I mentioned earlier that I'd seen mainly young people using the service, which begs the question of whether its use will spread to broader parts of the population as a preferred payment option. As I mentioned, my experience was purely anecdotal, but there is some science around the process by which consumers adopt new products. In our case, it's not entirely surprising that Afterpay appeals to a younger crowd, given the use of social media and almost instant trafficking of information amongst this cohort.

In the 60s, US author and sociologist Everett Rogers popularised what is known as the 'diffusion of innovations' theory (via his book of the same name), which breaks down the various stages of product adoption into five separate categories: innovators, early adopters, early majority, late majority, and laggards. 

When applied to Afterpay's customer base, we're now past the innovators stage and into the early adoptions, and (hopefully) heading towards an early majority. This is easier said than done, as the majority crowd is a little more risk averse and tends to sit back and see how things pan out – although they will listen to the thought leaders among the earlier groups. There's both food for thought and opportunity there.

Foolish takeaway

If Afterpay can stave off the competitors, the potential is enormous. It's enough to have a serious think about investing in Afterpay and I'd encourage you to have a look at our range of opinions on Afterpay here.

Motley Fool contributor JWoodward 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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