Talk about making hay while the sun shines! BNPL superstar of the ASX is capitalising on the record high Afterpay Ltd (ASX: APT) share price to launch an $800 million capital and issue a trading update.
The meteoric rise of Afterpay from March’s bear market trough and the structural shift towards online sales created a perfect time for the company to tap investors on the shoulder for cash.
It also gives its two co-founders, Anthony Eisen and Nicholas Molnar, a chance to off-load 4.1 million shares in the process to net them a cool $250 million plus cash pile.
Capital raise details
The new share offer is priced at $61.75 a pop, which is a relatively skinny 9.2% discount to yesterday’s closing price (the stock is in a trading halt this morning).
The cap raise is made up of $650 million fully-underwritten placement to institutional investors and a circa $150 million share purchase plan.
It’s always tricky to raise cash when key executives are not only not participating, but are selling part of their holdings.
But Afterpay is hoping investors won’t be spooked as it announced a very bullish trading update.
Should you worry about the drop in earnings?
Management is expecting FY20 revenue to surge 112% to $11.1 billion although underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to fall to between $20 million to $25 million.
That’s quite a fall given that Afterpay posted a proforma underlying EBITDA of $35.5 million in FY19.
But as long as investors are only watching the growth in active customers, who cares about profit right?
On that front, active users on its platform jumped 116% to 9.9 million as the COVID-19 pandemic provided a windfall for the group.
Consumers are largely stuck at home and have seen wages fall. The BNPL industry couldn’t have designed a better environment to grow.
The question is whether investors should participate in this capital raise. History seems to favour the brave as those who ploughed money into every other cap raise undertaken by Afterpay are well in the money (assuming they hung on).
The BNPL bubble
There’s also little doubt that Afterpay is the industry leader with enviable scale and lots of room left to grow. And that’s what the new cash is meant to fund.
On the flipside, some have warned that the BNPL space looks like a bubble as Afterpay’s peers like the Zip Co Ltd (ASX: Z1P) share price and Splitit Ltd (ASX: SPT) share price have been on a wild ride.
I can’t help but to think of the pot stocks that went pop not that long ago.
Medicinal marijuana is a real business and we know at some point it is likely to become a significant industry. The question is how much are investors willing to pay for the promise land now.
Should you buy Afterpay shares?
The other thing to think about is first mover advantage and Afterpay has lots of that. But there’s nothing stopping a retailer on signing on several BNPL providers, and the same can be said for consumers.
Afterpay looks cheap if you believe it can build and maintain its leadership in this space. Just remember that history holds plenty of examples of companies that opened a category only to lose out to rivals (think Atari and IBM personal computers), and vice versa (Apple Inc.).
If you can work out why some succeed while others fail, you will have a strong advantage over other retail investors.