The Afterpay Touch Group Ltd (ASX: APT) share price was uncharacteristically out of form in October.
During the month the payments company's shares lost almost 20% of their value to finish the period at $28.86.
Why were Afterpay's shares sold off in October?
The main catalyst for the payments company's sharp decline in October was a bearish broker note out of UBS.
According to the note, UBS commenced coverage on Afterpay with a sell rating and $17.25 price target.
The broker made the move due to concerns over the company's valuation, noting that excessive growth had already been priced into its shares.
UBS also has concerns over regulatory risks. It feels that the bigger the buy now pay later industry gets, the more likely it is to be classed as a credit product.
If this were to happen, it doesn't believe the market will be as willing to pay over the odds for its shares. It suggested that the market may value it on lower multiples more in line with Visa and MasterCard.
The Reserve Bank is now planning to look into the industry next year, but Afterpay has welcomed this.
A third concern that the broker has is competition. With competition in the industry heating up from the likes of Klarna, Sezzle Inc (ASX: SZL), Splitit Ltd (ASX: SPT), and Zip Co Ltd (ASX: Z1P), the broker appears concerned that a price war could weigh on transaction margins.
Especially in the massive United States market, where UBS feels Afterpay's average transaction value per customer will struggle to match the levels enjoyed in the ANZ market.
Not everyone is bearish.
Last month Morgan Stanley initiated coverage on Afterpay as well.
However, unlike UBS, Morgan Stanley is very bullish on the company's prospects. So much so, it slapped a buy rating and $44.00 price target on its shares.
It has been impressed with the way the company has disrupted payments and consumer finance operators.
Whilst I think UBS makes some valid points, at this stage I'm siding more with Morgan Stanley and would be a buyer of its shares today. Overall, I think the pullback in October ought to be considered a buying opportunity for investors.
