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Why the Afterpay share price is down 20% in just three days

The Afterpay Touch Group Ltd (ASX: APT) share price has continued its poor run and dropped lower again on Friday.

At one stage the payments company’s shares were down 8.5% to $29.21.

When its shares hit that level, it meant they had lost a massive 20% of their value in the space of just three days.

Why has the Afterpay share price crashed lower this week?

The catalyst for the payments company’s sharp decline this week was a broker note out of UBS on Wednesday.

According to the note, analysts at UBS initiated coverage on Afterpay with a sell rating and lowly $17.25 price target. This price target implies further potential downside of ~40% over the next 12 months.

Why is UBS bearish on Afterpay?

The broker has concerns over Afterpay’s valuation and believes that excessive growth has already been priced into its share price.

It also spoke about regulatory risks and how they might weigh on its shares in the future. UBS believes there is a risk that the bigger Afterpay and the buy now pay later market gets, the more likely it is going to be viewed as a credit product.

If this proves to be the case, then it suspects the market may value it on lower multiples that are more in line with Visa and MasterCard.

This is similar to what New York University’s Professor Scott Galloway suggested earlier this month when he warned that Afterpay and co. could see their shares lose half their value in the near future.

Another concern that UBS has is rising competition. Due to the increasing popularity of this payment method, the broker expects more and more players to be competing with Afterpay.

This could lead to a price war, reducing the margins on transactions. In light of this, the broker suspects that the company’s average transaction value per customer will struggle to match the levels enjoyed in the ANZ market.

Zip Co sinks.

It isn’t just the Afterpay share price that UBS has targeted. It also slapped a sell rating on rival Zip Co Ltd (ASX: Z1P). Which incidentally is down a further 10% this afternoon.

However, the price target it placed on Zip Co of $4.80 has now been breached. Zip Co’s shares are trading at $4.17 at the time of writing.

When the dust settles, I think that both Afterpay and Zip Co could be good options after these declines along with these hot stocks.

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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 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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