ASX investors have long struggled with a seemingly simple question: how much are shares of Afterpay Ltd (ASX: APT) really worth? At the time of writing, the market has decided a price of $124.38 is appropriate. But, judging history, this could change dramatically in the future. Back on 10 February, Afterpay was judged to be worth $160 a share at one point. And of course, in March last year, the market decided that a price under $9 was fair.
Since Afterpay doesn’t yet make positive earnings, or official profits just yet, it’s hard to value this company on its cash flows (or lack thereof). So it has turned into a ‘future profits’ game for this company.
Well, one investor isn’t so optimistic.
According to a report in the Australian Financial Review (AFR) this week, the highly regarded American brokerage firm Bernstein has just initiated coverage of the Afterpay share price. This is fitting, I suppose, seeing as it looks as though Afterpay is heading for a US listing soon.
So what did Bernstein, which the AFR notes are a firm “which has a reputation for high-quality investment research”, think of Afterpay shares today?
Well, not highly, it seems. Bernstein has reportedly given Afterpay a price target of just $40 a share. That’s a good 68% down from the share price we see right now.
Is Afterpay worth $40 a share?
Why such a low share price target? Well, Bernstein isn’t worried about Afterpay’s raw growth. The report states that Bernstein is actually assuming Afterpay will be able to grow its gross merchant value by ten times to $108 billion over the next 5 years. That will be fuelled by continued growth in the buy now, pay later (BNPL) market itself, as well as Afterpay growing its market share and expanding into new markets.
But Bernstein is predicting that Afterpay will have to bow to competitive pressure as it grows. It sees Afterpay experiencing margin compression, and estimated the company’s ‘take-rate’ will fall from the 3.8% it’s currently at to 2.8% over the next 5 years.
This, Bernstein says, is exactly what has happened to other payments companies like PayPal Holdings Inc (NASDAQ: PYPL). The broker also notes that PayPal managed to pull in a third of Afterpay’s payment volume in the first quarter of offering its own instalments plan.
Bernstein sees Afterpay hitting revenues of $3.6 billion in 2025 and profits of $349 million. That would deliver Afterpay earnings per share of $1.30, which would give Afterpay a share price of $51 a share on a price-to-earnings (P/E) ratio of 40. That $51 share price for 2025 has been discounted back to $40 today.
It’s worth noting that many other brokers are far more bullish on Afterpay. According to the AFR, broker Jefferies has recently raised its price target to $157.38 on higher revenue and growth forecasts. Citi has a $128.3 price target.
I guess we’ll have to wait until 2025 to see who’s right. But someone is going to be very wrong at the same time.