The Afterpay Touch Group Ltd (ASX: APT) share price is down more than 2% at the time of writing, despite the S&P/ASX 200 (INDEXASX: XJO) being up some 20 points or 0.35%.
This drop may have been driven by an article published today in the Australian Financial Review (AFR) discussing the company's valuation with reference to the recent WeWork IPO blunder.
What did the AFR article say?
The article highlighted that New York University's Professor Scott Galloway (who has been credited by many for blowing up the WeWork IPO) is now targeting the "buy-now, pay-later" (BPNL) sector, claiming that the Afterpay share price could halve within 12 months.
To set the scene, the US IPO market has been running hot with big names such as Lyft, Uber, Slack Technologies and Pinterest hitting the market on lofty valuations. Lyft, for example, was valued in its IPO at $24 billion, despite its previous valuation in the private market of $15 billion. The stock has been down more than 50% since its IPO as the company continues to log steep losses.
WeWork has been the most recent "unicorn" IPO to emerge, discounting its IPO valuation from $47 billion to $10–12 billion, despite a $1.9 billion net loss in 2018. Professor Galloway published an opinion on the WeWork IPO, citing that the business has "gone from unicorn to distressed asset in 30 days", to later witness the company pulling the plug on its IPO just ten days later.
Now, he has turned his eyes to Afterpay, claiming that a small proportion of US retailers already offer some form of BNPL product. One of the key issues that he addressed was that these BNPL companies don't have any "moats" that make their businesses competitive. It is more likely that credit card companies and other similar firms will join and overcrowd the BNPL market.
One of the main reasons why he believes the Afterpay share price could halve in the next 12 months is that Mastercard and Visa are valued at 18 to 19 times revenue, while Afterpay is trading at 37 times. At the same time, these payment giants are rolling out their own BNPL product, which will make the marketplace much more competitive.
Foolish takeaway
While the AFR article and Galloway's points are valid and highlight an increasingly crowded and competitive BNPL marketplace, Afterpay is expertly positioned to capture the millennial market, while also expanding its geographic reach in the US and UK.
I do agree that the Afterpay share price has run up far too hard in the short term, with its full year report propelling the share price up more than 30% in 5 weeks. However, I see no issue for Afterpay's fundamentals in the short- to medium-term.
