The share price of Afterpay Touch Group Ltd (ASX: APT) has fallen today after questions were raised about the value of Afterpay's US subsidiary, Afterpay Inc.
Afterpay is taking heat from an Australian Financial Review article that has again pointed out that the options that US employees have received on Afterpay Inc could mean that some of Afterpay's high valuation is in question.
The ASX-listed Afterpay obviously receives all of the benefit of earnings generated in Australia, but its US subsidiary has been giving out options to US employees so that they could acquire shares in Afterpay US, meaning ASX investors won't receive the full benefit of the growth of the US business, which is becoming as large as the Australian division.
Option holders may be able to exchange Afterpay US shares for ASX Afterpay shares in the future, but generally not before January 2023.
There is a limit of 10% on the amount of Afterpay US shares that can be issued to staff, and that limit has essentially been met with around 11 million shares and options issued to US employees (of a total of 110 million shares). Future incentives for US staff will be given in ASX-listed Afterpay shares.
However, one of the main things that the AFR article pointed out was that the 2019 options have a price of US$1.81 per share, valuing the US business at $290 million, much less than what the market is giving the US business a value of the overall $7.6 billion market cap for Afterpay.
I don't think the entire US business is only worth $290 million. But it does seem as though Afterpay is giving away some of the value of its business for less than it's actually worth. I think it would be fairer to price the options at the current market value of Afterpay (with the US business being around 40% of the overall Afterpay valuation according to the AFR's article), rather than the option prices that have been used. It's good for the employees and incentivises them, but it's not so good for ASX Afterpay shareholders who are being diluted.
Investors wouldn't like a capital raising being done at a price significantly lower than today, it could be said that this is kind of what's happening.
Foolish takeaway
It's too hard for me to get my head around Afterpay's valuation, there is a lot of growth priced into the market capitalisation but no profit yet and these options complicates things further.
