Afterpay bubble bursts

Another lesson for the Millennial bubblistas out there. We’ve been warning of this tech bubble and bust for quite a while. Now it is here. On the ASX, it was most focussed in “buy now, pay later stocks” led by Afterpay. That bubble is bursting:

What’s APT actually worth? Ask UBS:

Another very strong result. Maintain Sell on valuation grounds

APT reported yet another very strong result operationally. We had previously flagged upside to our forecasts: underlying sales of $9.8bn compared with UBSe $9.3bn, 13.1m active customers vs UBSe 12.4m. Net transaction margin of 2.18% was below UBSe (2.31%), nominally APT’s $214m NTM was in-line. We increase our PT to $36 but maintain our Sell rating, though we continue to acknowledge that in the absence of a catalyst the market is likely to continue to view APT’s valuation through a different lens.

$1.25bn capital raising announced. Could Matrix value APT at <$90/share?

APT announced a $1.25bn zero coupon 2026 convertible note offering (option to upsize by $250m) to 1) pay Matrix for 35% of its US convertible note (implied $10.6bn valuation for APT’s US business); 2) to fund a tender offer for US ESOPs with a maximum of $225m cash (US ESOPs are worth 10% of APT’s US business or implicitly $1.06bn at the transaction price); & 3) to accelerate sales growth. In our view, this is a good deal for APT’s shareholders given our view that the market is pricing in more for the US business (i.e. future shares issued to Matrix would have been more dilutive), but at 28% of APT’s market cap, it is somewhat peculiar that Matrix made this deal when we believe the market values APT’s US business at ~40%+ of APT’s valuation. Matrix’s acceptance of this cash deal could imply that its view of APT’s US or total business’ valuation is lower than the market: assuming the US comprises 40%-50% of APT’s valuation at the deal’s valuation implies a ~$75-$90 overall valuation for APT.

What do APT’s lead conversion rates mean for ‘no surcharge’ rules?

APT had not quantified lead conversions prior to its 1H21 result. On the analyst call, management stated that ~17% of APT’s sales are generated via lead conversions. With ~27m average monthly leads generated during 1H21, our back-solve suggests a ~6%-7% lead conversion rate. While this is well above other online lead generation models (which might convert at <1%), at 17% of sales, this implies that 83% of APT’s volume was not from leads. This is important when considering the BNPL industry’s argument that ‘no surcharge’ rules should be abolished as they provide marketing services to merchants. If no surcharge rules are disallowed, we see downside risk to our forecasts.

Valuation: $36 price target (equity DCF), previously $30

Higher operating assumptions drive $2.50 of the increase to our PT, vs $2.00 for the raising/restructure, & $1.50 due to a lower discount rate. To justify APT’s current share price, it needs to achieve >$400bn sales by FY30E at a 2.1% NTM (UBSe: ~$100bn).

If we reach that valuation then the top to bottom bust will be roughly 80%. Which says nothing whatsoever about the APT business. This round of valuation had nothing to do with that.

It was more like a rerun of this. At FTAlphville:

In the annals of investing literature, there are a few lessons which stick out. But perhaps none more so than the adage that at the right price, every asset is potentially a good investment.

…There is no better example of this rule-of-thumb than the shares of US technology conglomerate Cisco.

At the turn of the new millennium, the IT hardware, software and networking equipment company was one of the hottest stocks in the US equity market. From the beginning of 1999 to March 2000 the shares rose 236 per cent to a market capitalisation of $555bn, or $80.06 per share, backed by a crazed-enthusiasm for the technological shifts bought about by the internet. The thesis was solid: as a provider of networking equipment for both telecom players and other businesses, Cisco was the shovel-seller in a dot com gold rush. What could go wrong?

And, some might argue, it had the numbers to back it up. In the 2000 financial year, Cisco posted revenue growth of 55 per cent, gross margins of 66 per cent and had a return-on-equity of 14 per cent. Sure, top-line growth had slowed from 1994 when revenue had doubled, but as one of the few players sitting at the intersection of several technological trends, it surely was going to be one of the big winners of the new millennium.

Well yes and no. In one way, investors were right. Cisco was a big winner. Over the next 21 years, Cisco’s revenues grew four fold to $49bn, with profits quintupling to $11bn. Return-on-equity even improved, with the figure averaging 17 per cent over the next two decades, 3 percentage points above its 2000 number.

The problem was the share price. It was, simply, too damn high. At the March 2000 peak, Cisco’s price-to-earnings ratio stood at 201 times, its enterprise value to sales at 31 times and its price-to-free cash flow at 176 times. By anyone’s standards, the valuation was over-egged.

Afterpay meet CISCO. CISCO meet Afterpay.

David Llewellyn-Smith
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Comments

    • John don’t get me wrong, you know my opinion about the valuations of everything and I think Afterpay and all it’s mates are rediculous valuations
      After pay is going to turn up and skyrocket from here, think it’ll break 2021 highs
      I’m not buying any or buying into any of this bubble but watch this turn up now
      This insanity is far from over

      No one even cares about valuations.. …

        • What do you think?
          I’ve never seen you write anything that’s even partly intelligent
          Tight arse too, you jump on make comments to members when you can’t even afford 199

          I just bought after pay call options $136 Strike June 17…..pretty cheap, so if I’m wrong this one is going to cost me $

          It’s something I would rarely do, I don’t even know what after pay do? Someone told me it’s an alternative to credit card

          Don’t feel the bubble has burst, correction for higher in tech

          This circus has a long way to go

          Might even see above $160 or &180 level

          • darklydrawlMEMBER

            $168 is the current forecast on a couple of analyst papers I read today on APT. Folks smarter than me calculate the underlying value of the business at circa $30 a share. However this whole show is a circus. I did well from APT (I purchased back when it was in the low teens, so getting out at $102 wasn’t as good as $150, but good enough). No need to be greedy. If it keeps going up again you can always buy back in.

          • Dark
            I don’t even follow or know what they do
            I just saw this post and had a look on investing.com they dropped from $160 to $100
            Seems like that’s a pretty big sell off in a very short time frame
            That’s all
            Ps really what’s something is worth is just what the next person is wiling to pay these days

        • Mr Tezza
          After you said that comment I jumped straight on the phone to my broker to buy call options
          If I make $, I have you to thank
          If not oh well
          I feel you’ve given me the lucky touch

          $136 strike June Calls, delta 0.29

          And you guys know I never talk about trades

  1. Ronin8317MEMBER

    AfterPay is a pay day lender. Just because it has an APP doesn’t means it’s a tech company.

    • Strange EconomicsMEMBER

      Yeah. Profitable business model
      Its no Tech company like Cisco with a new technology, just an old loan shark model in App clothes.
      An Unregulated credit provider is always a good business model for the owners. Not so much the punters.
      No interest lures you in, but late fees paid by half the customers are about 50 % a month for small purchases.
      Still at 200 times earnings?

    • Afterpay is a sales tool. Pay day lenders charge fees for a temporary borrowing of cash. Afterpay charges no fees to the purchaser as long as the purchaser makes their agreed repayments.

      • I think you will find that:
        1. Afterpay isn’t a profitable company … yet. FY20 net loss was $(27)m.
        2. They generate a significant part of their money from late fees (14% or $70m out of $500m).
        3. Those merchant fees they charge look very disruptable – $430m which they say is 3.9% of underlying sales they facilitate (compare that to 2% or less for Visa / Mastercard).
        4. One of the reasons they make a loss is that their “Receivables Impairment Expense” was a whopping $95 million.

        It’s an interesting business but I agree with the article – it doesn’t match its valuation.

        • kiwikarynMEMBER

          If credit cards facilitated the same level of sales transactions, no-one would bother signing up for Afterpay as we’ve all been paying by credit card for decades. Clearly there is a benefit to merchants over and above simply taking payments, otherwise they wouldnt offer the service. Afterpay’s claims that merchants get a 30% lift in sales, so what price is an extra 30% in revenue worth to them? Probably a lot more than 1-2% extra in fees.

      • kiwikarynMEMBER

        Afterpay offers exactly the same service as GE Finance and Flexigroup except it reverses the marketing to be consumer rather than merchant driven. Its the same as Harvey Norman offering “no interest for 36 months” on purchases, then selling the purchase to GE Finance for a 6-12% discount, then GE receives payments from the customer. As for surcharging, what would happen if Harvey Norman told customers that they can have a “no interest” purchase but would have to pay a 6-12% “surcharge” for the privilege?

    • Afterpay is as much of a “tech” company as WeWork was. As stated above, it’s an old business model with predictable valuation metrics, tarted up and obfuscated by tech speak to justify valuations far in excess of their business model rivals.

  2. and in the end the regulators will wake up and realise that BNPLare just payday loans and breach the Code