Motley Fool Australia

Will you regret calling the Afterpay Ltd (ASX: APT) share price too expensive? 

ASX shares new high represented by boy standing on ladder against the backdrop of a cloudy sky

The Afterpay Ltd (ASX: APT) share price has been a standout buy now, pay later (BNPL) performer. With its share price fast approaching the symbolic $100 mark, could it be getting too expensive? 

A true market leader

The Afterpay share price has run more than 20% in the last month, outperforming all its peers including Zip Co Ltd (ASX: Z1P), Openpay Group Ltd (ASX: OPY), Sezzle Inc (ASX: SZL), Splitit Payments Ltd (ASX: SPT) and Laybuy Group Holdings Ltd (ASX: LBY)

Afterpay is a true market leader of both ASX tech shares and BNPL players. The Afterpay share price is the first to move in the initial stages of a rally, the first to move into new high ground and consistently delivers phenomenal growth. It’s this status that attracts institutional buying and how could we not forget the substantial shareholding from fintech giant Tencent?

I believe Afterpay’s market leader and darling status justifies its ability to outperform its peers. Even when the company’s reporting metrics might make it appear more expensive.

Zip vs. Afterpay share price 

I believe Zip is the nearest competitor to Afterpay with the likes of Sezzle and Splitit trailing behind. Meanwhile, Openpay, Laybuy and even Flexigroup Ltd (ASX: FXL) are lagging even further and investors would do well to avoid them for now, in my opinion.

Let’s take a look at the Zip vs. Afterpay numbers. Afterpay is still pending the release of its first quarter FY21 trading update so I will use FY20 results to compare the two companies. The following was reported in FY20.  

Afterpay 

  • $11.1 billion turnover 
  • 9.9 million customers 
  • $502.7 million revenue 
  • $27 billion market capitalisation (today) 

Zip 

  • $2.1 billion turnover 
  • 2.1 million customers 
  • $161 million revenue 
  • $4 billion market capitalisation (today)

Interestingly, Afterpay trades at 53 times FY20 revenue while Zip trades at just 24 times. However, on 15 October, Afterpay received yet another broker upgrade with Bell Potter increasing its target price to $121 following its US in-store rollout. 

Its in-store solution will now be available to all US customers. Shoppers can use Afterpay to purchase items in select retail stores using their Afterpay card, a virtual card stored in their digital wallets. 

Foolish takeaway

Even when investors think that BNPL shares are expensive, the Afterpay share price seems to take it to the next level. However, its business was arguably the first to develop momentum in the US and the first to receive substantial interest from a global fintech behemoth, Tencent. Its status and accomplishments cannot be rivalled.

However, I would not be in a rush to buy the Afterpay share price at today’s prices. I would prefer to wait for a pullback for stocks that have experienced a significant run up rather than chasing highs.

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Returns as of 6th October 2020

Lina Lim 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's parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited and Sezzle Inc. 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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