It's probably the hottest stock on the S&P/ ASX200 (ASX: XJO) right now and the Afterpay (ASX: APT) share price hit a record high of $28.70 this morning. So many market participants will be asking why have Afterpay shares climbed 9.6x since June 2017 and to another record high today?
Over the past couple of years the shares are up due to the success of the company in getting all of its key operating metrics to travel in the right direction. Such as underlying sales, active customers, active retailers, total income, gross losses, and net transaction loss.
In particular its early success in growing its U.S. business surprised the market and has really turbocharged its valuation. However, it may be facing a credible rival in the U.S. named Sezzle, but more on that later.
Over the short term though the share price is swinging more on sentiment than actual operating updates.
For example investors have been variously worried and then relieved over a senate inquiry into the business and now an upcoming audit of its AML/KYC obligations and policies.
As the shares are so popular they're also heavily traded by day traders looking to profit from short term momentum by scanning moving averages, charts, and other historical price action to take a position on which way the share price may move over a matter of minutes, hours, days, or weeks.
For example a popular trading strategy is to buy shares at 52-week highs in the belief that shares breaching record highs are more likely than not to move higher over the short term.
Other day traders even like to buy companies before they potentially hit round number values such as $100 in the belief that history shows a stock will then usually rise after breaching a psychologically important round number!
Other traders believe if a stock breaks a 20, 50, or 100 day moving average price to the down or upside then that is also a buy or sell signal as momentum under relative strength indices (RSIs) as an oscillator is important. Alongside order books and the market depth behind a stock.
Inter-war U.S. trader Jesse Livermore originally popularised many related trading strategies under a general method he described as "tape reading" because stock prices used to literally be printed out on tape, before electronic screens existed.
Livermore's "tape reading" method has now metamorphised into the electronic age via any number of traders all promoting their own strategies related to price action and technical analysis.
Recently, professional algorithmic, "robot", quant, or high frequency trading has also become a more influential part of short term stock price movements, although covering this would require another article.
Given Afterpay's phenomenal rise it's likely a lot of the short-term price action is down to traders attempting to jump on and off this freight train for a quick profit.
Ultimately though it'll be Afterpay's growth rates and underlying financial performance that decide the direction of the share price from here. I remain bullish on its growth prospects, but whether its valuation has got ahead of itself is a question for debate.
Notably it does have an emerging rival in the U.S. named Sezzle that recently launched in Canada signing up sportswear giant Kappa as a marquee retail client.
According to a source it now has 3,321 active merchants across 12 countries and 269,800 active customers.
This is roughly comparable to the 3,300 merchants Afterpay reported it had signed up in the US by the end of May, although interestingly Afterpay reported it had 1.5 million active customers more than 5x the number of Sezzle despite them having similar retailer numbers. I could only guess as to the reasons for the difference.
Sezzle then looks a potentially credible rival to Afterpay in the U.S. and much more so than the underwhelming Splitit Ltd (ASX: SPT).
Sezzle is also reportedly preparing its prospectus ahead of an upcoming ASX listing that could be hot if past history is any guide.
