Afterpay Touch Group Ltd (ASX: APT) pioneered the 'buy now, pay later' industry. However, as the sector comes under renewed regulatory scrutiny and emerging competitors, is there still growth and innovation left in the tank or should investors start looking elsewhere for the next tech growth stock?
What's behind Afterpay's recent turbulence?
Afterpay investors have experienced one crazy rollercoaster ride.
The company first announced a strongly supported capital raising back in early June. This was a raise of $317.2 million at $23.00 per share. The proceeds would be used to support the company'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 shares or $103.5 million. However, this sell-down was allocated to two significant US investors, Tiger Management and Woodson Capital.
The day following the capital raising and executive sell-down, Afterpay 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 audit in respect of its AML/CTF compliance.
In late June, Afterpay announced that it has established a dedicated sub-committee charged with assisting and reporting to the Afterpay board in relation to the oversight and management of the external audit process.
Furthermore, the Afterpay share price slumped on the back of news that global payments behemoth Visa, Inc. would enter the 'buy-now, pay-later' market by January 2020.
Earlier this month, Afterpay also announced a board and executive leadership update which involved co-founder Anthony Eisen assuming the role of CEO & Managing Director, while co-founder Nick Molnar will assume the role of Global Chief Revenue Officer, reporting to Anthony. In addition to this announcement, Anthony and Nick announced that they "do not intend to sell any further shares during the current financial year FY2020."
Is Afterpay a buy?
Afterpay is exhibiting too much volatility while its peers, notably its WAAAX stablemates, are cruising into new constructive highs. WiseTech Global Ltd (ASX: WTC), Appen Ltd (ASX: APX), Altium Ltd (ASX: ALU) and Xero Ltd (ASX: XRO) are all within 2–5% of their all-time highs, while Afterpay has slumped 10% in the last 5 days.
Afterpay has painted a clear picture of what the company sets to achieve in the short-to-medium term – namely $20 billion in underlying sales/gross merchandise value (GMV) by 2022. Furthermore, the company possess a unique, dominant product positioning within the millennial cohort and remains confident that it can match its Australian success in the US market.
The company's fundamentals and product position is crystal clear, however, I would wait to see if the Afterpay share price is looking to consolidate on recent volatility or actually exhibiting short-to-medium term weakness. Given the current risk/reward, I would hold off on purchasing Afterpay shares.
How about Zip Co?
Zip Co Ltd (ASX: Z1P) is an Afterpay competitor operating with a similar product offering in the same retail space. In my opinion, anything that Zip Co can do, Afterpay can do better.
However, while most people are inclined to choose a Coke over a Pepsi, that doesn't mean that the Pepsi is a redundant product. Zip is on track to beat the expectations it set at the beginning of FY19, while already ahead of its goals of transaction volumes of $1 billion and a customer base of 1 million. The company has recently brought onboard some iconic Australian brands such as Bunnings, Officeworks, Target and Chemist Warehouse.
The Zip share price has also exhibited some constructive consolidation over the past two months and makes it a much more appealing investment in the short term.
