The market may be dropping lower on Thursday, but that hasn't stopped the Afterpay Ltd (ASX: APT) share price from charging higher.
In morning trade the payments company's shares jumped 9.5% to reach a record high of $82.00.
Why is the Afterpay share price rocketing higher?
Investors have been scrambling to buy Afterpay shares today following the release of an after-market update on Wednesday.
That update revealed that the company now expects to report stronger than predicted earnings before interest, tax, depreciation and amortisation (EBITDA) in FY 2020.
On 7 July 2020, Afterpay announced that its Net Transaction Loss (NTL) as a percentage of underlying sales was expected to be up to 55 basis points in FY 2020. However, since then, the company has experienced higher than anticipated collections of instalment payments relating to its 30 June 2020 receivables balance.
Management explained: "The July Trading Update for the FY20 NTL% was based on a relatively short period of collections data relating to the 30 June 2020 receivables balance from 1 July 2020 through to the date of the 7 July 2020 announcement. Since that time, and with the benefit of more collections data reviewed as part of the process of preparing the full year financial statements, a reduced NTL% is now expected."
What does this mean for its earnings?
As a result of the above, management now expects to report a much-improved NTL of just 0.38% for FY 2020.
This means that its Net Transaction Margin (NTM) as a percentage of underlying sales will be stronger than expected, giving its profitability a major boost.
So much so, Afterpay's EBITDA is now expected to be approximately $44 million in FY 2020. This is a 76% to 120% increase on its previous EBITDA guidance of $20 million to $25 million.
Another positive is that its provisions for the year will now be much lower. Afterpay's unaudited provision for expected losses is forecast to be approximately $34 million. This represents 4.16% of its unaudited gross consumer receivables balance of approximately $817 million.
Is it too late to invest?
I continue to believe that Afterpay is a great long term investment. However, its shares are looking pretty expensive, so they carry a lot of risk. In light of this, I would suggest investors keep their position to just a small part of a balanced portfolio.
