Is UBS right to drop a bombshell on the Afterpay share price?

Will Afterpay sink like the ride sharing and aggregated food delivery platforms?

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The Afterpay Touch Group Ltd (ASX: APT) share price is down 7% to $34 today after a nearly blasphemous research note out of UBS claimed the buy-now-pay-later business is wildly overvalued. 

I don’t have a copy of the report, but according to my colleague James Mickleboro UBS is worried the U.S. market will prove too competitive for Afterpay.

It’s logical that the likes of Klarna, Sezzle Inc (ASX: SZL)Splitit Ltd (ASX: SPT) and other far larger payments businesses like PayPal or Visa could take market share from Afterpay.  

The kicker being that their best opportunity to take market share is by undercutting the fees Afterpay currently charges merchants. 

This could create a race-to-the-bottom type scenario amongst deep-pocketed competitors that has eviscerated the profitability of other large-scale consumer-facing disruptors.

For example the likes of Uber, Lyft and Ola cannot turn a profit to save their lives, while the takeaway restaurant aggregators like UberEats, Deliveroo, DoorDashMenulog and Just Eat are also now sacrificing profits in a ferocious fight for market share. 

Notably, not dissimilarly to Afterpay, all these ‘disruptors’ also rely on dubious regulation (over whether drivers are employees or contractors in Uber’s case) and the largesse of law makers to keep their shows on the road.

Uber for example just reported a US$5.2 billion quarterly loss and the argument from high profile fund manager Magellan Financial Group Ltd (ASX: MFG) that it’s little more than a Ponzi-type scheme reliant on new investors money to prop up old investors’ returns may hold water given the preposterous losses. 

UBS also reportedly raised the prospect of tougher regulations for Afterpay hurting its potential profitability down the line.

Overall, I still think investors would be wise to only make Afterpay a small part of a balanced investment portfolio. As despite the hype the risks around slowing growth halving the valuation are real. 

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Tom Richardson owns shares of AFTERPAY T FPO, Just Eat, Visa, and Magellan Financial Group.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Uber Technologies and owns and recommends Visa and PayPal  The Motley Fool Australia has recommended Sezzle Inc. 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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