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Why the Afterpay (ASX:APT) share price is charging higher today

the words buy now pay later on digital screen, afterpay share price
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In afternoon trade the Afterpay Ltd (ASX: APT) share price is among the best performers on the S&P/ASX 200 Index (ASX: XJO).

At the time of writing the payments company’s shares are up 5% to $83.73.

Why is the Afterpay share price charging higher?

Today’s gain appears to be attributable to a broker note out of Goldman Sachs this morning.

Although the broker has only retained its neutral rating, it has reaffirmed its $93.45 price target.

This price target implies potential upside of approximately 11.5% for its shares over the next 12 months even after today’s sizeable gain.

What did Goldman Sachs say about Afterpay?

Although in September Goldman Sachs believes Afterpay had its weakest month of app downloads in the ANZ market since February 2018, this was in line with its expectations due to the maturing market.

Its data shows that Afterpay and Zip Co Ltd (ASX: Z1P) remain the clear market leaders, with FlexiGroup Limited (ASX: FXL) gaining traction with its humm platform.

Conversely, across in the United States, the broker notes that Afterpay had its strongest month of app downloads in history with approximately ~330,000 downloads.

Based on this, Goldman Sachs estimates that the company now has a user base of ~6.7 million in the United States, which is up from 5.6 million at 30 Jun 2020.

Pleasingly, with November and December typically peak app download months, Goldman believes Afterpay is on track to achieve its U.S. forecast of 7.8 million users in the first half and 10.3 million users for the full year.

Though, it does note that competition is increasing in the key market.

Goldman commented: “We expect competition could become more aggressive and note recent retailer switches include HAUS Laboratories (Lady Gaga’s cosmetic label) moving to Klarna from APT and the Decker Group brands (e.g. UGG, Teva, Hoka) moving to APT from Quadpay. This elevated competition could manifest itself in the form of merchant fee compression and/or co-marketing costs.”

Nevertheless, for now, the broker remains positive on Afterpay’s margins in North America thanks to smaller merchants (which are charged more) becoming a larger portion of Afterpay’s merchant sales mix.

Should you invest?

I think Afterpay is a great option due to its massive global market opportunity.

And due to its recent share price weakness, I feel now could be a good buying opportunity for investors that are willing to make a long term and patient investment.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. 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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