Hey everyone, so in today’s video we’ll take a look at the ASX stock Afterpay and
review its inception, news, past performance and the current environment to hopefully give
you an understanding of the stock before you decide to invest in it for good.
I will try to present everything in a factual and unbiased way because we want to leave
emotions at the door when we make any investment decisions.
So is Buy Now Pay Later darling stock that’s seen an 800% increase in its stock price still
worth it Is it not too late to get in on the action Well let’s jump right in.
Afterpay was founded in January of 2015 by Nicholas, who was managing an online jewellery
store on ebay, and his then neighbour Anthony, who was the executive director of an investment
holdings company Guiness Peat at the time.
The initial version of Afterpay was to give retailers an online platform to manage their
layby sales.
If you don’t remember, layby was similar to the buy now pay later service, but you
only get the product AFTER you’ve paid all the installments.
Anyway Afterpay quickly partnered with a payments system company called Touchcorp which was
formerly owned by Anthony’s Guiness Peat investment company that could process all
of Afterpay’s payments, and with that, the first use of Afterpay went live on a jewellery
website called iceonline.com.au which still has a big Afterpay logo on the front.
Within 6 months, they managed to get 15 retailers to use the payment system which is a remarkable
feat for such a young company.
With this continued momentum, and racking up more and more retailers for another year
before Afterpay was floated on the ASX in April 2016 for… wait for it… $1 a share.
Looking at that with the 2020 lens, it was such a bargain back then, and don’t you
wish you bought some back then.
Even within the first 3 months of the float, its price went up 150%.
Let’s fast forward another year and Afterpay managed to get contract deals with big retailers
like Myer, Officeworks, Country Road, Super Retail Group, BigCommerce and Big W. Throw
in a partnership with Tyro Payments who provides retailers with eftpos payment machines and
Afterpay has pretty much set itself up to be able to integrate with every retailer’s
Point of Sale, even if they haven’t signed contracts with them yet.
While all of this happened, Afterpay’s share price stayed pretty much the same for the
next year, but that’s only until the announcement of the Touchcorp and Afterpay merger was allowed
by the court hearings.
This was pretty much a given considering Afterpay was expanding its market share exponentially
but still relied completely on Touchcorp to process all its transactions.
So with that, in July of 2017, AFY closed trading at $2.74 and TCH closed trading at
$1.67 to form APT that we know today and began trading again at $2.95.
Afterpay’s momentum right through to August 2017 was very strong, more than doubling its
customers in only 8 months to over a million users, and 5 million transactions since it
began.
Which means customers are using it on average 5 times after signing up.
This is important because it means that people aren’t just using it once and ditching it.
Now with 7200 retailers offering the service on behalf of Afterpay, the company was able
to produce 23 million dollars in merchant fee revenue.
But they weren’t done yet.
Retail was only a small slice of the pie because they had eyes on a new sector which was expected
to be twice as big as retail.
Travel.
The first partnership to be revealed was Jetstar, the budget airline of Qantas.
This was big news because it set precedence for airlines to open its gates for the buy
now pay later market.
And Afterpay stock price also rode this news upwards.
So naturally the next step was to target the other budget airline Tigerair before moving
onto the big guns, Virgin and Qantas.
So in March of 2018, the announcement of the now extinct Tigerair offering a Buy Now Pay
Later option was made, in partnership with…
Zip pay.
Yeah, that wasn’t supposed to happen, and the stock price took its first significant
dip from $7.50 down to $5.50.
This was only temporary though because the strength of its retail arm was so strong,
with merchant fee revenue increasing to 37 million, and the entrance of Afterpay for
the US market was also announced soon after so the stock price recovered quickly.
This bull run was ended again 5 months later, because Virgin Australia also signed with,
you guessed it, Zip pay as well.
But again the price dip was temporary because of successes in the retail partnerships locally,
and more overseas success in the US market as well.
Fast forward to 2019 and the strong economic growth meant strong consumer spending which
naturally aligns with increased earnings, and therefore increasing stock price.
The first half Financial Year Results of 2020 reports continued growth in Australia, with
sales increasing to more than 3 billion dollars, an increase of 55% from the year before.
The US market also generated a massive 1.4 billion dollars in sales, which is a phenomenal
455% increase from the year before, and the user base already exceeding that of Australia’s.
The early ventures in the UK market under the brand Clearpay picked up a respectable
200 million dollars in sales already with over 6 hundred thousand users.
Things were looking so good.
But remember, this was in February 2020.
And we all know what happens next.
roll covid tape On March 23rd at the height of the situation,
the stock price reached as low as $8.90, but that was when the economy recovery began.
At first the recovery was in line with most other stocks, right up until May 1st, because
that's when a massive announcement was released.
Tencent, one of the world’s largest video game company, one of the world’s largest
social media company, one of the world’s largest venture capital and investment holding
company had invested 300 million dollars to buy a 5% stake in Afterpay.
This was massive for the company because it allows them to tap into the knowledge of the
world’s most successful digital platform and apply it to their own.
And investors crammed in on the back of this news to drive the stock price higher than
it had ever been before.
This was covered in all the news outlets and happened at a time when new ASX investors
were joining the stock market in record numbers.
The stock price continued to rise on the back of continued success in the US with 5 million
active users, and in the UK with 1 million active users equating to increased sales and
revenue.
But what about its competitors?
Well it’s direct rival is easily Zip Pay who has seen similar meteoric rises in their
earnings and as a result its stock price.
The story behind Zip is quite interesting as well and probably needs a whole video to
cover.
The other smaller competitors in Australia are Splitit, Sezzle, Openpay and most notably
the Swedish company Klarna which has the backing of CBA.
Perhaps the goal for CBA is to make the Buy Now Pay Later function integrate with their
banking app, which may give Afterpay a run for its money.
Klarna is also the dominant Buy Now Pay Later service in the UK.
In the US, the biggest hurdle to Afterpay is Shopify, which is almost a carbon copy
of the 4 equal interest free installments model that Afterpay uses.
So as you can see, the Buy Now Pay Later sector actually has very little barriers to entry
and is very crowded.
There’s no doubt that the competition will be fierce and only one or two in each country
will come out on top.
Also, the biggest hurdle for all these companies are the Credit Cards, which, when you think
about it, are also buy now pay later cards which have been around for much much longer.
And if someone already has a credit card which offers points for spending, why would they
use Afterpay It would make no sense to use both either since they are paying an annual
fee and need to make that back through the rewards program.
So what does the future hold for Afterpay Whilst the growth and expansion into new markets
is very promising, the market is really only limited to people who 1) Don’t have a Credit
Card.
2) Have minimal savings and need to wait for paychecks.
And 3) Are technologically savvy.
This really points to one group; the millennials, who, by Afterpay’s own financial reports,
make up the biggest proportion of users.
Since the concept is still quite new, the novelty is there for all the millennials signing
up in recent years.
Afterpay has been called the ASX tech darling stock so many times but how long will that
last, because it's very possible that this concept is likely going to wear off and hit
a plateau eventually.
When will that be Well, we can only guess now, find out later.
Thanks for watching the first of these types of videos.
I tried not to go into the financial figures and capital raises too much because there
are already so many videos that do that already.
So anyway, I already can’t wait to make the next one about an ASX company so definitely
hit that subscribe button so you get notified as soon as I release one.
And leave a comment if you want to see a video on your favourite company and I might just
choose it on the next release.
Thanks again for watching and I’ll see you in the next video.