Why is the Afterpay (ASX:APT) share price so volatile?

Volatility, why is thy name Afterpay?

| More on:
Scared looking people on a rollercoaster ride, just like the Afterpay share price in recent months.

Image source: Getty Images

For the many things the Afterpay Ltd (ASX: APT) share price is known for, stability is not high on the list. Yes, this buy now, pay later (BNPL) pioneer has delivered some neck-cracking growth over the past few years. Just for context, the Afterpay share price is currently still up an incredible 4,016% over the past 5 years at its current level of $121.47 a share (at the time of writing).

But that growth has not come smoothly.

A brief history of a BNPL giant

Back in 2018, Afterpay shares rose more than 200% between just April and August. In the 2 subsequent months, the company then lost roughly 42% of its value. In 2019, we saw a similar experience, with the shares putting on more than 70% over just a couple of months, but not without a subsequent 25% drop as well.

And then, we had 2020.

The coronavirus-induced market crash in early 2020 saw global markets tank. The S&P/ASX 200 Index (ASX: XJO) alone lost roughly 36% between 20 February and 23 March 2020.

But that was nothing compared to what happened to Afterpay shares. Afterpay was riding high in early 2020, hitting new all-time highs and peaking at close to $40 by February. But when the market crash hit, Afterpay shares were annihilated. The company rapidly fell from close to $40 in February to under $9 a share by 23 March. That was a fall of close to 80% peak to trough.

But for investors who managed to hold on during this wild ride, the rewards were even more dramatic. Once it became clear that the global economy was going to be liberally supported by government intervention, global markets rebounded across April and May 2020.

By May, Afterpay was back to making new all-time highs above $40 a share. By August, it had hit $80. And by February 2021, $160 a share (its current all-time high).

In more recent months, the Afterpay share price has been influenced by the takeover offer that was made for the company by Square Inc (NYSE: SQ). Square is to acquire Afterpay after the US-based payments company made an all-scrip offer of 0.375 Square shares for every Afterpay share back in August.

Why is the Afterpay share price so volatile?

So now we have a good idea of how volatile the Afterpay share price is, why is this the case?

That’s a complex question. The most important thing to note is Afterpay’s reputation as an ASX growth share. Growth shares are usually characterised by a number of factors. These include rapid revenue growth rates, negative earnings, a reputation for ‘disruption’ and a passionate investor base. Afterpay has arguably displayed all of these characteristics for a number of years now.

It is difficult to value a company of this nature with traditional metrics like the price-to-earnings (P/E) ratio. As such, we often see a wide variety of views as to what the future holds. In other words, you tend to see investors flocking to one of two camps: ‘Afterpay is way too cheap’, or ‘Afterpay is way too expensive’.

This dichotomy can be described as one of the possible reasons Afterpay shares have been so volatile over the past few years. If and when Afterpay is swallowed by Square, the ASX will lose one of its hottest, but most polarising and volatile shares it has seen in years. But the Afterpay share price has sure made many investors very happy along the way.

Should you invest $1,000 in Afterpay right now?

Before you consider Afterpay, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Afterpay wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on BNPL shares