Is the Afterpay Touch Group Ltd (ASX: APT) share price a buy after falling 75% due to the coronavirus?
There aren't many shares that have been punished as heavily as Afterpay as investors worry about the buy now, pay later operator.
I think it's very understandable why investors are concerned about what may happen to the economy. Italy has been in lockdown for 10 days already and yet the Italian Prime Minister has warned the lockdown will probably have to go on for longer than the original early April date.
The US and the UK haven't been as affected as Italy or Spain yet, but their governments have been accused of not doing enough in the early stages and their infection numbers continue to compound higher.
So what's the likely outcome for Afterpay?
Well that's the question isn't it?
It's hard to say. A decent portion of Afterpay's sales were made in store – in-store sales made up 24% of Australia and New Zealand underlying sales in the December 2019 half-year result. That element of underlying sales may be harmed if less people are visiting shops.
However, the rest of the underlying sales were made online. People are still buying stuff online, perhaps more so than a few months ago.
Afterpay was priced for a lot of growth over the next few years. That growth has been pushed out. If the only thing that happens is Afterpay's growth targets are pushed from FY22 to FY23, or FY24, I don't think Afterpay's precipitous fall is fair. I don't think Afterpay was worth a share price of $40 before, but the 75% fall may have been too much if Afterpay's balance sheet can ride this out.
However, there could be problems if Australia, the UK and the US enter a painful recession.
Is Afterpay safe?
Yesterday Afterpay distributed a letter to tell investors it will be okay.
Afterpay said that 90% of its monthly underlying sales is generated by repeat customers who use the service responsibly. Its average outstanding balance is $211, which it said has no material concentration on its books.
It also said that the average age of its customers is 33 years, meaning that its customer base is largely not close to the most at-risk age brackets of older people.
In terms of the financials, Afterpay said it has more than $1.09 billion of warehouse facilities, which are committed and not subject to traditional debt facility covenants.
The weighted average life of its debt facilities is 2.1 years. It also said that the duration of its receivables are matched to the duration of drawn debt at any given time.
It also said it has a strong liquidity position of $672 million, with $402.5 million of cash.
Foolish takeaway
The company is still going ahead with Afterpay Day, which is over two days, on 19 March and 20 March.
I think this period is showing the potential problem of being invested in a business that doesn't make profit. If you've been waiting to buy Afterpay shares for a while then today's price is clearly a lot cheaper and may prove to be a good long-term buy. But there's nothing stopping it from going lower. I wouldn't personally invest today.
