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Is Afterpay an ASX blue chip of tomorrow?

Will Afterpay Ltd (ASX: APT) join the likes of Commonwealth Bank of Australia (ASX: CBA) and CSL Limited (ASX: CSL) and be an ASX blue chip of tomorrow?

The way the Afterpay share price has been performing in recent weeks would indicate so, at least.

Afterpay shares have been on an absolute tear since reaching a two-year low back in March. Then, Afterpay reached as low as $8.01 a share – a level not seen since June 2018.

Today, it’s a different story, with Afterpay at fresh all-time highs above $44 a share. Anyone who picked up some Afterpay shares in late March would be looking at a gain of over 400% in just two months.

So will this breakneck growth continue for Afterpay long enough to justify that coveted ‘blue chip’ status?

Does Afterpay have what it takes to become an ASX blue chip?

On current prices, Afterpay has a market capitalisation of $11.9 billion. That’s enough to put the company in the S&P/ASX 200 Index (ASX: XJO) to be sure – even into the ASX 50. But (at the time of writing), there is still a lot of space between Afterpay’s market cap, and the market cap of real ASX blue chips like Woolworths Group Ltd (ASX: WOW), Commonwealth Bank and CSL.

But there’s more to being a blue chip than just sheer size.

The term ‘blue chip’ derives from poker, where the highest value gambling tiles are coloured blue. Conventionally, ‘blue chip’ shares represent not just size, but safe cash flows and a robust business model. Afterpay is yet to fulfil those two criteria in my view.

But that doesn’t mean it won’t in the near future.

Afterpay’s opportunity for ‘blue chip’ status

For Afterpay to be a true ASX blue chip, I think it has to cement its position in the crowded field of the payments sector. It will need to prove it can become reliably profitable and prove it can fend off competition from the real blue chips in the payments space – the US giants MasterCard and Visa.

These companies are stupendously profitable and have market caps of $US292.2 billion and US$405.8 billion respectively.

Australia is a fantastic economy, but it’s my belief that it doesn’t offer Afterpay enough scale and ammunition for ‘blue chip’ status on its own, given Afterpay’s small-margin ‘clip the ticket’ business model. For Afterpay to truly succeed and become a blue chip, it needs to operate on a global scale much like MasterCard and Visa.

The good news is that Afterpay is heading in the right direction. Its US growth numbers are very pleasing, as are its numbers from the UK and Europe. Its partnership with Chinese giant, Tencent Holdings is also conducive for growth opportunities in Asia.

We’ll have to see if Afterpay can truly become an ASX blue chip. But I think it’s treading the right path!

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Motley Fool contributor Sebastian Bowen 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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