The Afterpay Touch Group Ltd (ASX: APT) share price will be on watch on Tuesday after the payments company was downgraded by a leading broker.
Who has downgraded Afterpay?
According to a note out of Goldman Sachs, its analysts have taken Afterpay's shares off their conviction buy list and downgraded them to a neutral rating with a slightly increased price target of $27.15.
The broker made the move on valuation grounds after a stellar run which has seen the company's shares rise over 46% since it added them to its conviction buy list.
What would it take for Goldman to be more positive?
Although it is neutral now, Goldman Sachs revealed a few things that could make it more positive on the company in the near term.
One is that customer additions grow quicker than expected. If the company "demonstrates customer additions to its platform materially above our forecasts, this would be a potential positive catalyst."
Goldman has forecast 8,305 daily customer additions in the second half of FY 2019, 9,309 per day in FY 2020, and then 11,684 per day in FY 2021.
Innovation is something else that could make the broker more positive on Afterpay.
Goldman explained: "… we believe one of the key value drivers of APT will be the repository of data it is developing. To date, product innovation has been limited, and we would like to see more detail on how APT plans to develop and introduce new products and/or services to leverage this extensive data base at its FY19 Result in August."
The broker also highlighted further geographic expansion as a potential positive catalyst. It notes that its forecasts are predicated on the company remaining in its existing markets, but should Afterpay enter additional markets it would represent incremental opportunity above its current estimates.
A final factor that could make Goldman Sachs more positive is the company's unit economics.
The broker said: "In 1H19, we have seen a strong NTP Contribution from the ANZ market, which demonstrates how its unit economics scale strongly. However, we expect a slower improvement in margins for its US and UK businesses given we assume much higher loss rates and higher interchange fees (in the US). Any developments that indicate our assumptions are too conservative would make us more positive (and vice versa)."
But until then, the broker appears happy to sit on its neutral rating.
