Afterpay share price overbought says analyst

The Afterpay share price has soared 571% from this year’s low point to an intraday peak last week. But can it continue to grow at this pace?

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Zip share price man hitting digital screen saying buy now pay later

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Morgans Senior Technical Analyst Violeta Todorova has rated the Afterpay Ltd (ASX: APT) share price as overbought. Violeta points out that the share has risen by 571% from its March trough to its peak in intraday trading last week. She further points out the technical indicators are in overbought territory. 

Afterpay has pioneered the buy now, pay later (BNPL) sector within Australia. Accordingly its share price has largely been on a bull run since 2019 and the company posted a sales increase of ~100% for FYTD 2020 when compared with the prior corresponding period. Afterpay has become quite ubiquitous in the Aussie retail sector with its branding displayed across a plethora of retailers and ecommerce websites. 

However, the time of large-scale growth in the Afterpay share price is likely over in the analyst’s view, and I couldn’t agree more. 

Why the Afterpay share price stalled early this week

Last week’s explosion of interest in BNPL companies underscored the low barriers to entry within the sector. At the time of writing, the Zip Co Ltd (ASX: Z1P) share price is up 10% from its trading open on Friday. Zip Co also operates in the BNPL sector. However, unlike Afterpay, it offers other services such as lines of credit and the Pocketbook personal budgeting tool.  In addition, Zip Co targets a generation of older millennials, people aged around 35 years and over.

Furthermore, Zip Co has more stringent credit worthiness checks in place than Afterpay. Therefore it is less exposed to credit defaults as the global economy continues down an uncertain path.

Afterpay is starting to establish itself in the United States. Meanwhile, however, Sezzle Inc. (ASX: SZL), another BNPL player, is a native of the US$5 trillion retail economy and is headquartered there. Sezzle has built a network of 1.3 million users and 14.9 thousand merchants.

The company is laser focused on the credit card shunning generations of Gen Z and Millennials; Afterpay’s core demographic. 

The problem with large numbers

The Afterpay share price values the company at $13.9 billion. This makes it larger than Santos Ltd (ASX: STO). If Afterpay doubles its price once more, it would be valued at more than Woodside Petroleum Limited (ASX: WPL). While this could happen, I sincerely and absolutely doubt it. Afterall, in FY19, Afterpay made $236 million in sales revenue. In contrast, for Sezzle to multiply its share price 10 times would value the company at ~$2.5 billion.

Foolish takeaway

Afterpay is no longer alone in a wide blue ocean. With little barriers to entry, the BNPL marketplace is increasingly crowded. Moreover, larger entrants like the 5% Commonwealth Bank of Australia (ASX: CBA) owned Klarna are yet to really start moving.

Lastly, it has a lower creditworthiness threshold exposing it to credit defaults and is pressing into markets where other competitors are already established. If all that isn’t enough, the company is already valued at more than Santos even though its gross sales are 24 times less.

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Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has recommended Sezzle Inc. 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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