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Morgan Stanley tips Afterpay share price to race higher

The Afterpay Touch Group Ltd (ASX: APT) share price is 2.8% higher at $37.12 this morning after the sell side research desk at Morgan Stanley released a research note tipping the stock to hit $44 over the next 12 months.

Morgan Stanley joins other brokers Goldman Sachs and Bell Potter in tipping the shares to move higher, with all three having a lot of influence over retail investors. 

I expect Morgan Stanley won’t be the last broker to start Afterpay coverage on an optimistic note through 2019 and 2020.

When it comes to research powerful buy-side institutional investors will tend to do their own research and keep it close to their chests, although they will take research notes from sell side houses that include brokerage functions.

This practice of ‘soft commissions’ has historically been in the sights of international regulators as it has been claimed that buy-side managers may be unduly influenced as to where to pay brokerage fees depending on who provides them research.

The point being that buy-side managers have a duty to seek ‘best price execution’ for their own underlying unit holders, rather than giving business to brokers that provide research or take them out for long lunches. 

Sell side brokerage and research arms also make more brokerage fees from retail investors the more they update price targets or ‘ratings’ as retail investors tend to follow the research to trade. 

None of this is relevant to Afterpay though, which is now close to tripling in value over just the past year and is up around 12x since June 2017.

Not bad for a business with no moat, bad economics and big regulatory problems according to its critics.

Ever since scrip changed hands for $5 the stock was also regularly labelled ‘overvalued’ by its critics, but it has shown how breakneck growth usually rides roughshod over all else for investors. 

As at June 30 2019 Afterpay had 32,300 merchants providing buy-now-pay-later services to 4.3 million shoppers. It was also reportedly adding around 12,000 new shoppers a day in ANZ, the US and UK. 

The kicker is that Afterpay and rivals such as Z1P Co Ltd (ASX: Z1P) have room to expand both geographically and across product offerings.

For now they mainly provide services in the online and over-the-counter physical retail space, but have potential to expand into the services sector (flights, dentists, doctors, massages, restaurants, etc,) as an interest free alternative to credit cards. 

As I’ve written before, it’s probably true that Afterpay has neither much of a moat or great economics compared to most of its tech peers in the software-as-a-service space. However, that’s not to say it cannot prove a share market success. On balance then I’d only suggest it makes up a small part of any investment portfolio. 

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Tom Richardson owns shares of AFTERPAY T FPO.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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