Afterpay ASX:APT Business Update 6 June 2019

Investment Analysis Clubs Saul’s Investing Discussions
1

Afterpay has been mentioned on the board a few time. If you are not worried about the FX frustration, you should learn more about this Australian high growth company.

Highlights in the lastest business updates:

Underlying sales were approximately $4.7 billion in the 11 months to 31 May 2019 (unaudited), up
143% on the prior comparable period.

There are over 4.3 million active customers transacting with Afterpay as at the end of May, growing at an average of approximately 7,900 new customers per day since 31 December 2018.

Afterpay has partnered with approximately 30,600 active merchants as at the end of May,
up 7,400 or 32% on 31 December 2018.

US Market Update

? Growth continues to remain strong in the United States. After just over 1 year of operations
Afterpay has acquired over 1.5 million active customers who are now able to shop with over 3,300
active merchants as at the end of May. There are a further 1,100 merchants in the process of
integrating with the platform.

? Afterpay US underlying sales was approximately $780m (unaudited) for the 11 months to 31 May
2019.

My take:

APT market cap is less than US$4B.
APT is not a SaaS company. Growth is above 100% yoy.
APT was profitable before US expansions.
Cash utilisation is 6 X a year. 4 payments by fortnightly. 2 months total cash turnaround.
US expansion is very successful and UK expansion is underway under the banner of ClearPay.
APT has a large addressable market.
Buy Now Pay Later sector.
Big multinationals on board. And help to launch from one country to another. eg. Urban Outfitters was on board first in Australia, then became initial launching partner in US and UK.
From the initial data in Australia, any retailers rolled out Afterpay and their sales increase by around 30%. That brought a lots of its competitors rush to use BNPL (Buy Now Pay Later).
Entering into health sectors: you can pay your root canal by Afterpay now in Australia.

Risks and Concerns:

Its model is not recession tested.
APT takes a cut of around 4% from the pass-through sales. Bad debts was about 0.5% in Australia. US market is not tested. We need to monitor the figure here carefully.
A takeover from Paypal/Visa and etc.

Disclosure: My top holding since mid 2017 at U$3.00.

12 Likes
2

One of my concerns about this company is the ease with which more established companies can jump in to compete. For example, among other credit cards and accounts, I have an American Express card. They have started offering “Plan It”, which lets users spread payments across multiple months at no interest, although there is a small monthly fee for using it. I have never used the feature, as I pay in full each month. The service AmEx is offering seems to compete directly with Afterpay. And instead of trying to build a network of vendors who accept the card, and a base of customers with existing banking relationships, they have that all already. Some coding, a run by the corporate lawyer, and they are off to the races.

I don’t see what would stop other credit card companies from similarly jumping in the fray as well, and doing it at scale, rather than as new entrants. This seems like a pretty basic financial service, rather than something difficult to duplicate. Square and Shopify also seem positioned to roll out something like this pretty easily. What distinguishes Afterpay, or differentiates them from what a slew of credit card companies or banks could offer? Many of the other companies on Saul’s board seem to have intellectual property in the form of patents on their technology, or a massive lead in something difficult to replicate, or both. Afterpay does seem highly scalable, which is a benefit.

No position in Afterpay or AmEx. Long Square and Shopify.

Justin

4 Likes
3

At this stage, APT is only listed in ASX. The company will at some stage try to list in Nasdaq.

The typical users in Australia are Millennials who do not have a credit card. They are paid fortnightly and same frequency as Afterpay instalments. I use credit card like most of people here in Australia. But next generation think differently.

Credit card companies may not want to cannibalise their sales by offering similar BNPL products. They may have a different branding to do so. That’s where my takeover concerns are.

Afterpay now is a verb which used widely in Australia like google. Hopefully will happen in US and UK soon. :slight_smile: Quite few fashion brands in US are on board and I expect more and more in the foreseeable future. Seems to me the growth of Afterpay will accelerate from now on.

Cheers

Will

1 Like
4 
In addition to their launches into US and now UK that builds on their Australia and New Zealand base, they have filed for trademark registration in Canada and a number of countries in South East Asia.

Whilst the developed markets represent typical Millennial ecommerce and retail opportunities along the same lines of Australia, launching into SE Asia could be an enormous opportunity to target 2x the US or EU population of consumers where affordability is a barrier to just about everything.  

Afterpay could be a killer affordability solution for just about everything.  I know in my industry (healthcare), being able to spread payments for everything from Dr consultations to medication purchases which are all mostly out of pocket for this part of the world would be awesome.  Afterpay has already expanded into the health and vision vertical in Australia!

A
5

In addition to their launches into US and now UK that builds on their Australia and New Zealand base, they have filed for trademark registration in Canada and a number of countries in South East Asia.

Whilst the developed markets represent typical Millennial ecommerce and retail opportunities along the same lines of Australia, launching into SE Asia could be an enormous opportunity to target 2x the US or EU population of consumers where affordability is a barrier to just about everything.

Afterpay could be a killer affordability solution for just about everything. I know in my industry (healthcare), being able to spread payments for everything from Dr consultations to medication purchases which are all mostly out of pocket for this part of the world would be awesome. Afterpay has already expanded into the health and vision vertical in Australia!

A

4 Likes
6

Afterpay’s, is more suited to Millenials who are native mobile app users, and prefer payment apps to using cards. This is Afterpay’s competitive advantage over credit cards in this market.

Afterpay is the top dog, and first mover. Its competitive advantages are:

  1. Network effect. It has the most retailers, making it more desirable for consumers.
  2. It is the most well known afterpayment service, and is now a verb in ANZ. This development is not through an expensive marketing campaign. Usage has simply gone viral, driven by retailers who are hungry for the sales boost the service gives, and through word of mouth.

Afterpay presents a significant global threat to Visa and Mastercard, and I think investors in these companies should consider their thesis for holding them carefully, as Afterpay is beginning to disrupt their business model. I think Visa and Mastercard are aware of the threat, and it will be interesting to see if they attempt a takeover.

https://www.businessinsider.com.au/australia-credit-card-deb…

1 Like
7

Afterpay is also going viral in the USA (at least google trends says so): https://i.ibb.co/YZd2ktr/USA-Search.jpg

1 Like
8

Is there a way to invest in afterpay in the US, or would you need to open a brokerage through Australia?

9

There are two ways for investors to buy foreign stocks directly. You can open a global account with a broker in your home country. Fidelity, E*TRADE, Charles Schwab, and Interactive Brokers all offer this service. The other is to open an account with a local broker in the target country. The Boom’s Trading Platform in Hong Kong or OCBC Securities in Singapore are among the brokers that offer services to foreign investors.

10

I looked on fidelity and it looks like you can buy it right there from the brokerage. Assuming AFTPF is the correct company?

11

Afterpay shareholder here. Justin, thanks for your thoughts!

One of my concerns about this company is the ease with which more established companies can jump in to compete. For example, among other credit cards and accounts, I have an American Express card. They have started offering “Plan It”, which lets users spread payments across multiple months at no interest, although there is a small monthly fee for using it.

Afterpay is targeting the millennial market. They get other people, too, but their forte is the young. Specifically they are targeting people who don’t have credit cards and don’t want credit cards. They are targeting people who are scared of debt and are trying to avoid it. They do not charge a small monthly fee. They are free to consumers. It’s the retailer who pays their fees.

There are people who would prefer to pay a small monthly fee so they can enjoy the status symbol of the little plastic cards in their wallet. But there are other people–a lot of them–who don’t actually give a damn of the status symbol of the little plastic cards in their wallet. These people prefer free to small monthly fees. Also these people don’t like debt and try to avoid it. They try to avoid debt and try to avoid small monthly fees.

American Express

  1. Debt
  2. Small Monthly Fees

Afterpay

  1. No debt
  2. Free

To me that’s a no-brainer value proposition.

We are holders, by the way, of Square, Visa, PayPal and Afterpay. I love these payment companies. They are awesome. But make no mistake, what Afterpay is doing is amazing. I am of the (optimistic) opinion that Afterpay will take a large share of the market from credit card companies. So for all those people who like free and no debt and dislike small monthly fees and debt, I would suggest you look into Afterpay.

The big question, of course, is Afterpay’s ability to convince retailers to accept their service. They pulled this off in Australia–they own Australia–and are making quick headway into the USA and UK. But the financial payment market is beyond big, so there will be a lot of winners here.

I don’t see what would stop other credit card companies from similarly jumping in the fray as well, and doing it at scale, rather than as new entrants.

Afterpay is disruptive to their business because Afterpay is attacking debt and small monthly fees. Afterpay is a classic rule-breaker. While credit card companies have strong advantages that you name, it’s not easy for them to market a service of free and no debt, because those marketing attempts would undercut their existing business model. Of course Visa or Mastercard could give up on debt financing and start advertising that they too are hostile to debt. But they’re not about to do that.

Afterpay is much closer to the young bucks like PayPal and Square than the old debt monsters like Visa, Mastercard, and AmEx.

This seems like a pretty basic financial service, rather than something difficult to duplicate. Square and Shopify also seem positioned to roll out something like this pretty easily.

PayPal and Square are definite potential competitors/acquirers. In particular I think PayPal is likely to try to come in and do this. Square and Shopify, not so much, because those guys market to retailers, not to consumers. Afterpay is a natural fit in the PayPal vision of the world. I am hopeful that Afterpay will have a couple more years of fantastic growth and then PayPal will acknowledge the inevitable and acquire them. But as for why PayPal can’t come in and destroy them now? They face the same difficulty that Afterpay faces–convincing retailers to accept their value proposition. You have to build the actual business, not just talk about what you could do. Afterpay has a tremendous headstart on PayPal in this arena. But it’s certainly not easy to become a retailing juggernaut that severely undercuts the classic debt model of retail commerce.

Taylor

7 Likes
12

I looked on fidelity and it looks like you can buy it right there from the brokerage. Assuming AFTPF is the correct company?

That is the ADR and it’s what we bought. Afterpay is thinly traded. I was shocked at how thinly traded it is.

I’m of the opinion that New York is oblivious to Afterpay.

13

I would agree

14

Afterpay is always zero interest, and there are never additional fees when you pay on time. The only fees are for late payments.

https://www.afterpay.com/how-it-works

The Blockbuster late fee business model?

http://www.nbcnews.com/id/39332696/ns/business-retail/t/hubr…

The offer tapped into consumer anger because Blockbuster’s fees could double or triple the cost of a video rental. And Netflix’s flat-fee system also ended up killing a golden goose for Blockbuster. In 2000 Blockbuster collected nearly $800 million in late fees, accounting for 16 percent of its revenue. Last year, those late fees had plunged to $134 million, or just 3 percent of the company’s revenue.

15

Mauser,

I don’t think another company is out there offering to pay whenever you want with no additional fees. So there doesn’t seem to be NFLX disruptor in this case. No money in AfterPay personally, but just commenting. I’d imagine Blockbuster before NFLX was a growth company and good investment but that is well before I began investing and just a guess.

AJ

16

Afterpay are in a trading halt, announcing a capital raising to accelerate international expansion.

Target set to increase GPV from $5b presently to over $20B in 3 years. As part of the capital raise, management will sell donw a small proportion of their holdings (1.9% if capital)to US investors Tiger Management and Woodson Capital.

The capital raise will dilute current shareholders by 5%.

3 Likes
17

Is it me or does the volume for the past year look very low, like between 0-45k and with days of zero volume or just 90. I can only go back 1 yr, so I am not sure when they started to trade on the ASX. IMHO I will be waiting for them to hit the Nasdaq where we can keep a closer eye on the financials, because I just don’t like the erratic volume I am seeing.

18

With their capital raise, I’m not sure where that leaves them as far as a US listing goes. However with their global expansion intensions I’m pretty sure they will need to raise more once they have tapped US and UK for all its worth. They are targeting Canada and South East Asia with trademark registrations.

They gave a business update today after the capital raise…
https://www.afterpaytouch.com/images/190611_ASX-Announcement…

US continues to boom and the UK launch appears to have got off the ground successfully. Whilst Klarna had first mover advantage in Europe and US, it looks as though Afterpay is overhauling them in the US. Their other competitor in the US is Sezzle who is also raising capital and contemplating an Australian IPO. Afterpay has pretty much seen off the local competition in Australia and New Zealand as after rans.

https://www.businessinsider.com.au/hello-sezzle-the-buy-now-…

https://www.globalbankingandfinance.com/klarnas-global-growt…

This is a $5bn (AUD) company and it’s up 35% already for me since I got in last year but up 5x in the last 1.5 years. Waiting for a US listing might be an expensive wait. If you have access to buy stock on the Australian market and want to get into AfterPay then I would go for it on the ASX. It’s a well regulated financial market.

Cheers
Ant

1 Like