Afterpay Ltd (ASX: APT) shareholders have had a rough time recently.
The stock is down 26% in the past month even after a 9% rally Wednesday morning taking it to $116.33.
And the same morning saw news of US fintech giant Paypal Holdings Inc (NASDAQ: PYPL) starting its own buy now, pay later (BNPL) service in Australia from June.
Investors had flocked to Afterpay shares in an almost cult-like way in the past couple of years. And they've enjoyed an excellent run — the Afterpay share price started 2019 at the $12 mark, then started last year around $30. Last month it peaked at $160.
But unfortunately, after a long bull run, it seems some are losing faith.
Monash Investors principal Simon Shields is one.
"We sold out completely of our Afterpay at $150 a share," he said in a Livewire video last week.
"Essentially, at $150 we felt that we were getting paid for the next 7 or 8 years of execution by Afterpay. So why wait around and see if they do a good job doing it? We took our money, and we left."
Why sell out of Afterpay shares?
One of the attractive characteristics of Afterpay, according to Shields, is that customers tend to use it more frequently the longer they have been with the service.
"So in the first year, the customer would use it 4 or 5 times. And that grows to 12 times in the third year. And now, when you go 4+ years out… you're up to 29 times."
But the fund manager pointed out that this number isn't quite as hot as it seems.
"That sounds like a lot. When you bring that back to how many times a month that is, that's less than 3 times a month. And we're not talking about big amounts of money for each transaction."
This usage pattern allowed Monash Investors to quantitatively calculate Afterpay's future prospects.
"It's actually easier to forecast the forward revenues on Afterpay than what it is for a normal company that's having to go out every year and re-establish new customers."
Shields said he would consider buying back in in the future.
"I've been a big bull on Afterpay. I think the business is a magnificent business," he said.
"If [the Afterpay share price] comes back enough, then it's upside might meet our hurdles again. And we may go back in."
What does Paypal's buy now, pay later look like?
While Paypal had not provided details to The Motley Fool at the time of writing, smh.com.au reports customers can access up to $1,500 through the BNPL service.
Then they can pay it back in four instalments. There is no interest charged but a $10 fee for each missed payment, capped at $30 for transactions greater than $125 or $10 for purchases under that amount.
Afterpay understandably downplayed the challenge from Paypal when the service launched in the US last year.
