Given Afterpay Touch Group Ltd (ASX: APT) cannot stay out of the headlines whether for its regulatory problems with AUSTRAC or due to the plans of payments giant Visa Inc. (NYSE: V) to muscle in on the buy-now-pay-later payments space I thought it might be worth taking a look at which of the two businesses is a better buy for share market investors.
I've previously covered how the external audit of Afterpay's AML/ CTF obligations is not a material risk assuming the company jumps through the hoops with assistance from a professional consultant most likely one of the big 4 consulting firms.
In fact it's relatively simple to buy a custom built compliance monitoring plan from one of these consultants, Afterpay's responsible staff will just have to show they enforce and understand it in order to pass its audit likely with a couple of minor qualifications.
The risk of competition from Visa though has left the market (including myself) confused as to just what kind of a threat it presents and I must admit I've not had time to look at the issue in detail.
Nonetheless it's worth considering which might be the better company to buy today, so let's compare them FIFA Women's World Cup Football style on a few different operating metrics.
Profitability – Visa just posted a US$3 billion profit for the quarter ending March 31, 2019. Afterpay reported a ballooning loss of $21.5 million for the half-year ending December 31, 2019. Visa 1 – 0 Afterpay.
Shareholder returns – Afterpay just asked investors to tip in another $317 million in return for issuing another 13.8 million shares at $23 a pop. And that might not be the end of the dilution. By contrast Visa returned a monster US$2.6 billion to shareholders over the quarter via share buybacks and dividends. Afterpay own goal! Visa 2 – 0 Afterpay
Moat / Competitive advantage – This one is more subjective, but to me Afterpay's merchant fees of around 4% are still vulnerable to a competitor offering the product cheaper. Whereas Visa's global scale, giant networks and capital backing requirements mean it's virtually impossible for a new competitor to muscle in on its market share. Visa 3 – Afterpay 0.
Growth – Afterpay wins here as its gangbusters growth rate in Australia and the U.S. is something I've never seen from an ASX company before. Visa just grew quarterly earnings per share 17%, which is impressive for a company its size, but not enough. Visa 3 – Afterpay 1.
Outlook – Visa's outlook looks hot to me as the world moves away from cash and contactless payments takes off outside already developed markets like the UK and Australia. Contactless payments for small items like coffee actually accelerate the shift from cash, yet Visa has hardly got going in this space in huge markets like the U.S. partly due to different banking rules.
Afterpay still boasts a potentially strong outlook, although we've seen Visa and others potentially pose it a big threat. Visa 4 – Afterpay 1.
Value – Despite its outstanding qualities Visa sells for around 33x annualised EPS, while Afterpay's $6.68 billion valuation on a $26.46 share price is built on anticipated growth and wild enthusiasm. After all it's yet to post a profit. Visa 5 – Afterpay 1.
Risk – Visa's growth rates could slow down and it's on a relatively high valuation, but its scale provides big advantages. Whereas Afterpay faces a potential red card from AUSTRAC, rising competition, and a slowing consumer economy in Australia. In fairness though, Afterpay does have potentially more raw upside. Goal apiece.
Visa 6 – Afterpay 2.
That's full time, no need for penalty kicks here as Visa thumps Afterpay.
Still there's no shame in that as Visa would thump just about every company on the local share market. As such I'd suggest local investors remember there's a big universe of quality blue-chip tech companies outside Australia. Especially when we consider how some of the local tech favourites such as Appen Ltd (ASX: APX), Pro Medicus Limited (ASX: PME) or Wisetech Global Ltd (ASX: WTC) now trade at valuations that make Visa look a screaming bargain.
