ASX market darling Afterpay Ltd (ASX: APT) continues to come under pressure today after a third leading broker downgraded the stock.
The Afterpay share price fell 2.4% during lunch time trade to $27.21, although it's off the morning low of $26.20. In contrast, the S&P/ASX 200 Index (Index:^AXJO) is down by around 1%.
Shares in the buy now, pay later leader have come under pressure after a few brokers downgraded the stock. This was despite the group filing a positive earnings update.
Downgraded to "sell"
UBS downgraded the stock to "sell" from "neutral" as it believes that the Afterpay share price does not properly reflect the risks posed by the COVID-19 pandemic.
"The precise mechanics of how COVID-19 impacts APT's P&L [profit and loss], and the extent to which APT will rein in costs is unclear," said UBS which put a price target of $13.20 on the stock.
"We believe APT remains reliant on materially uncertain long-term assumptions. Other risks previously identified (competition, regulation, execution) remain, though COVID19 could also accelerate positive structural changes."
Afterpay a high-risk investment
UBS's dim assessment comes in the wake of a downgrade by Goldman Sachs, and they aren't alone in cutting their ratings on Afterpay.
Citigroup joined in by downgrading its call on the stock to "neutral" from "buy" with a high-risk rating.
The stock's 200% plus jump over the past three and a half weeks makes Afterpay look fully priced, according to Citi.
"The key positives from Afterpay's trading update were the improving trends in April and the resilience of the ANZ business," said the broker.
"However, we expect growth to slow significantly in the near term, which combined with the recent strength in the share price results in us downgrading [the stock]."
Growth momentum set to slow
Slowing growth may not have showed up in the April data, but Citi believes momentum will fade. This is based on the view that merchant sales will weaken due to plunging consumer confidence due to the shutdown of the global economy caused by coronavirus.
Further, risk controls are becoming stricter in this environment, and that will further weigh on sales.
"While Afterpay has not seen a material deterioration in leading credit indicators, we expect bad debts to increase going forward," said Citi.
"We assume a decline in spending over the next 6 months, with an improvement later this year."
Citi's price target on Afterpay is $27.10 a share.
