It might have seemed crazy at the time, but now leading broker Morgan Stanley is tipping the group’s shares to hit $101.
Why was I bullish on the Afterpay share price?
When I wrote that article on 17 June, the group’s shares were trading at $56.52 with a market capitalisation of $15.1 billion.
It was my view that the ability to maintain a low bad debt expense and continue growing retail merchant networks were key to Afterpay’s future growth. Successful international expansions including the United States and the United Kingdom were another big part of my bullish cash.
At the time, many might have thought the Afterpay share price had topped out. However, the buy now, pay later group’s shares have continued to climb and closed at $66.00 per share yesterday.
What did Morgan Stanley say in its research?
Perhaps unsurprisingly, the leading broker highlighted many of the same themes carrying the Afterpay share price in 2020.
According to an article in the Australian Financial Review, Morgan Stanley is tipping Afterpay to hit $101. That’s a significant increase from its previous price target of just $36 for the buy now, pay later share.
Morgan Stanley said in a note to clients that Afterpay was ‘demonstrating better-than-expected credit quality control, while accelerating sales growth and diversifying away from the fashion category’.
The broker’s most optimistic scenario even had the Afterpay share price tipped to hit $242.80.
Why is everyone so bullish on Afterpay?
Consistently strong trading updates have been the key to Afterpay’s strong share price gains.
That includes Tuesday’s ASX announcement highlighting that underlying Q4 FY20 sales were up 127% year-on-year to $3.8 billion.
The group’s Net Transaction Margin for FY20 is expected to be approximately 2%, which Afterpay sees as the key to longer-term profitability.
Yesterday, Afterpay advised it has successfully raised $650 million through an institutional placement. This will be followed by a $150 million share purchase plan and comes as the company looks to strengthen its balance sheet and fund further expansion in 2020.
That expansion looks set to continue overseas with Afterpay targeting growth in Canada in Q1 FY21.
Would I buy Afterpay shares?
I think there are a lot of tailwinds for the Afterpay share price right now. The group’s trading update on Tuesday showed strong current sales, strategic expansion plans and, overall, painted a pretty good picture.
However, at $66 per share, I’m not sure I’d be buying in right now. While I wouldn’t be surprised to see the Afterpay share price hit $100 in 2020, it looks to be speculative given its astronomic price-to-revenue ratio.
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Motley Fool contributor Ken Hall 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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