Conerns over the COVID-19 coronavirus have hit ASX shares like Afterpay Ltd (ASX: APT) hard. In fact, the Afterpay share price is down 42.54% since the start of March (at the time of writing). But, what impact could the global pandemic actually have on a company like Afterpay?
Why Afterpay shares have crashed lower
I think the Afterpay share price losses are two-fold. On the one hand, Afterpay shares had been on a very bullish run. Prior to the emergence of COVID-19 as a real threat, its share price hit $41.14 per share. That’s pretty incredible for a company that doesn’t have strong free cash flow, nor a dividend.
Investors were pricing much of Afterpay’s value on the future. Some argue that Afterpay’s buy now, pay later business could capitalise on the US and deliver strong profits in the future. Others think that the real value is in how much targeted data Afterpay has on its customers.
Either way, Afterpay shares were valued exceptionally highly prior to COVID-19. That has now been more than halved to just $19.06 prior to this morning’s open.
Investors are pricing in what the direct impact of the coronavirus might be on Afterpay. Its primary business is clearly in providing buy now, pay later services. However, the downstream impact on many of its merchants may hit Afterpay’s earnings. If we do hit a recession, many retailers will inevitably shut up shop. Similarly, for those sectors directly impacted like travel, it means fewer people booking and paying with Afterpay.
All in all, that could mean fewer merchants and less revenue for Afterpay. A recession could unravel things very quickly. If people lose their jobs, they could also default on their payments to Afterpay. That may not be a huge part of its business, but the Afterpay share price crash looks to be accounting for these factors.
So what’s the verdict?
Despite the above, I’m personally quite bullish on Afterpay shares. It’s still early days in this COVID-19 pandemic for Australia. However, we have seen China resume production and get on with day to day life. If that’s the case in Australia, demand could see a quick resurgence.
In the short-term, there may be some pain. But if you were investing in Afterpay for the long-term before, I’m not sure too much has changed. Yes, the short-term earnings hit will hurt. But if I buy Afterpay shares, I’m looking to hold for at least 5 years or more.
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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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