The Afterpay Ltd (ASX: APT) share price has been one of the great gravity defying shares of FY20. Although not the first buy now, pay later (BNPL) company in the world, Afterpay has definitely done it very well. It is head and shoulders above any Australian rivals, and is already starting to see early success in foreign markets, particularly the US.
However, The Australian reported yesterday on an unlisted start up called Limepay, which is already seeking to disrupt the BNPL business model. Limepay allows merchants to integrate an online payments platform with their own branding, and to add their own BNPL functionality if they wish.
So, what does this mean for the future of the Afterpay share price?
The battle of the business models
The secret to the Afterpay share price miracle has been a business model where supposedly everybody wins. Consumers with limited discretionary funds can purchase items using no interest instalments, merchants see an increase in sales and pay a small 3–6% fee. Seems like a good thing all round, doesn't it?
Limepay has a counter argument, and it may be right. First, vendors get it. The BNPL wave of short term credit has taught everyone that customers want instalment plans. So why should they allow another company to get in between them and their customers? Couldn't they just do this themselves? That would enable them to maintain a long-term relationship with their customers.
Both the Afterpay website and the Zip Co Ltd (ASX: Z1P) website have an entire catalogue of merchants you can buy from. So they have taken customers as part of a sale in one store, and targeted them with competitors' products. The longer I think about this, the more I think this could be a threat to the BNPL business model.
The Limepay model is to enable companies to do their own instalment plans, and works with businesses such as the Accor group, which uses the platform for its 40,000 loyalty members.
The Afterpay share price
The Afterpay share price rose by 178.3% over the past year. This is despite bushfires, a pandemic and a lockdown. At this price, the company has a market valuation greater than Santos Ltd (ASX: STO) and Crown Resorts Ltd (ASX: CWN) combined. Nevertheless, there is some justification for this.
Afterpay is the clear leader in Australia. In overseas expansion, its UK subsidiary, Clearpay, already has over 1 million active shoppers. Similarly, Afterpay announced it has 5 million active shoppers in the US, and a total consumer count of approximately 9 million. Across the entire business the company has reported 9.9 million active shoppers for FY20.
Lastly, there was the recent stake purchased by Tencent Holdings Ltd, which holds at least 5%. Tencent is one of the world's largest companies and operates China's leading digital payments service, Weixin Pay. Although no specific plans have been disclosed to move into Asian markets, there is a lot of speculation.
So, what has all this growth delivered? In the company's unaudited release it reported total sales of $11.1 billion in FY20. Sales represent the transactions that have passed through the Afterpay system through whatever means. The company is forecasting a net transaction margin of approximately 2%.
In contrast, Tyro Payments Ltd (ASX: TYR) recently announced the company's total transactions for FY20, in just Australia, stood at $2o.131 billion. However, the transaction margin in this case is approximately 1%. Tyro is a payments processing company, not a BNPL company. The example is to illustrate the scale of the raw figures.
Foolish takeaway
In summary, I think the Limepay business model is likely to appeal to predominantly large companies that are well branded. For many small-to-medium companies the Afterpay association helps generate sales. However, this is only one of the areas where the Afterpay share price is likely to hit headwinds.
First, a raft of other competitors have already sprung up, such as the Commonwealth Bank of Australia (ASX: CBA)-backed BNPL product, Klarna. The appearance of the Limepay model, as well as the number of BNPL competitors, highlight the low barriers to entry in the space. Second, Afterpay already seems to have roused the ire of regulators in Australia.
While Afterpay is growing very fast, I see its current share price as totally overvalued. It may reach $100 as forecast by analysts at Morgan Stanley, but I do not believe it is sustainable. For instance, in raw growth alone, it had to expand across 3 continents to achieve a level of transactions other companies have been able to achieve within Australia.
