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Afterpay share price sinks lower on bearish broker note

Broker holding red flag in front of bear

The market may be charging higher today but the same cannot be said for the Afterpay Touch Group Ltd (ASX: APT) share price.

In morning trade the payments company’s shares have tumbled 6% to $34.26.

Why is the Afterpay share price tumbling lower today?

With no news out of the company, today’s decline appears to be attributable to a broker note released this morning.

Hot on the heels of Morgan Stanley commencing coverage on Afterpay with a buy rating and $44.00 price target yesterday, analysts at UBS have initiated coverage on the company today.

As you might have guessed from the share price reaction, the broker isn’t bullish on the buy now pay later provider. In fact, it has broken ranks with its fellow brokers and slapped a sell rating and lowly $17.25 price target on Afterpay’s shares.

Based on the company’s last close price of $36.56, this price target implies potential downside of almost 53% over the next 12 months.

Interestingly, this is in line with the view of New York University’s Professor Scott Galloway. Earlier this month he warned that Afterpay and fellow buy now pay later providers could see their valuations halve in the next 12 months.

Why is UBS bearish on Afterpay?

According to the note, the broker believes that excessive growth has already been priced into its share price.

In addition to this, it believes there are regulatory risks to consider. Especially given how the bigger it grows, the more likely it is going to be viewed as a credit product.

UBS also has concerns over the U.S. market. It suspects that competition could increase materially and weigh on its margins in the key market. Overall, it doesn’t believe the company’s average transaction value per customer will match the levels enjoyed in the ANZ market.

This news appears to have rattled the shareholders of its rivals. In morning trade the FlexiGroup Limited (ASX: FXL) share price is down 2.5% and the Zip Co Ltd (ASX: Z1P) share price has fallen 4%.

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Returns as of 6th October 2020

James Mickleboro has no position in any of the stocks mentioned. 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 recommended FlexiGroup Limited. 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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