Being from Oz, I thought I would introduce a company that has completeley disrupted the retail finance industry in Australia.
Way back, Australians would place items they wanted to buy, but didn’t have the funds, on ‘lay-by’. A deposit would be made, and the item/good would be put aside for the customer until the item is paid off, usially over a period of 3 or 4 pay periods.
Afterpay have flipped this concept, allowing cusotmers to take the item/good immediatley, and pay after (hence the name). The merchant is charge a 4% fee on the sale, and the coustomer pays back afterpay with four, fortnightly re-payments. The customer wins, as they get what they want now (so millenial), the merchant makes a sale more quickly, and afterpay clips the ticket on the sale. The whole process is steamlined via a mobile app.
Now, the average term of the “loan” (technically and legally, it is not a loan, as no interest is charged) is 4 weeks. This means that afterpay can churn its inventory about 12 times a year - thats 4% x 12 per annum.
Initially, the afterpay grew as an online payments system, but, with the mobile app, retailers on the main street merchants can utilise the service and do. In fact they must to compete, due to the network effect, as customers will shop elsewhere if they don’t offer “afterpay”.
Ok, so the business is quite young. Here are the past three year financials:
Year 2016 2017 2018
Revenue 1.4 22.9 142
Transaction margin 2.3% 2.5% 2.6%
Revenue growth 1405% 288%
Afterpay adj. operating cashflow was $35 M AUD for FY2018.
US Expansion - Commenced operations around May 2018;
May June July Mid-August
No. Retail merchants: 28 121 282 422
Underlying mercant sales: 0 11.7 20.4 TBC
A promising start in the US.
UK Expansion - Just begun.
2.5x Austalian addressible market
With about 230 million shares at $17 AUD per share, the company is valued at $3.9 Billion AUD ($2.8 Billion USD). That is a price to sales ratio at around 27. Although, revenue is expected to double (at least) this year.
Key risks: The Afterpay model has never been tested in a recession. The biggest risk to the business is defaulting customers. Net transaction loss is running at 0.4% in good times. No one knows what it will increase to in a recession.