Is the Afterpay Touch Group Ltd (ASX: APT) share price a buy?
The buy now, pay later business continues to be one of the most volatile I've seen on the ASX with positive and negative news in seemingly equal frequency.
After the latest news hitting the headlines the Afterpay share price has gone lower by 19% after the last week.
A buy
A business that falls in 19% in quick order is certainly nominally cheaper than it was before, so perhaps it's better value. The opportunity sizes of the markets in the US, UK and Australia are the same as they were a week ago.
Afterpay is targeting huge growth of its gross merchandise volume over the next few years, and every six months it reports that it is indeed continuing to grow revenue at a tremendous pace.
Indeed, the buy now pay later sector is replacing credit cards. As Fool editor Lauren Surplice pointed out to me, Mozo has done research showing that half of BNPL users say they've stopped using their credit cards to spend. That's impressive disruption.
Afterpay continues to diversify its revenue by expanding into other sectors beyond retail such as travel, dentistry and optometry.
Not a buy
The RBA research into the buy now, pay later sector hasn't started yet – it's scheduled to start next year – but there's one potential scenario where the central bank decides that businesses should be allowed to pass on Afterpay's merchant fee to customers. This could make Afterpay less attractive to investors and customers, which would hurt growth.
Mozo also reported that 60% of BNPL users purchased things they wouldn't have due to payment instalments, 25% of users hide purchases from friends & family and 28% have gotten into financial strife because of BNPL services. Are these signs of completely sustainable earnings?
One of the main reasons I'm not looking to buy is Afterpay's valuation. It's cheaper than it was last week, but over the past year the share price has still more than doubled. The current price assumes a lot of success, doesn't really take into account what a recession would do to earnings and it's not even profitable yet.
Foolish takeaway
Afterpay will probably keep growing strongly in FY20, but I'm not looking to buy shares with how uncertainty and confusion there is.
