Australia’s dominant 'buy now, pay later' success story is leveraging its first-mover advantage to target the US, an ecommerce opportunity worth 20 times the local market.<\/p>\n
-Rapid penetration into online sales exerts magnetic 'network effect' on merchants and customers By Nicki Bourlioufas<\/p>\n Afterpay Touch Group ((APT)) continues to attract investors' attention as a rapidly growing fintech that has established itself as the market leader in 'buy now, receive now, pay later' finance for both online and instore shoppers.<\/p>\n Afterpay recently announced a strategic partnership with experienced tech-focused US venture capital firm Matrix Capital Partners<\/strong>, which will invest in and advise on the Australian company's US expansion plans.<\/p>\n Afterpay IPO-ed in 2016 and in June 2017 merged with another listed fintech, Touchcorp, to form Afterpay Touch Group.<\/p>\n The company’s deferred payment product allows shoppers to make purchases without interest charges, up-front fees or loan application forms. Consumers typically pay off these 'reverse laybuys' in four equal fortnightly instalments.<\/p>\n Afterpay’s revenue comes from merchant fees, which averaged 4.1% in 2016-17, plus late fees levied on users who miss deadlines.<\/p>\n The Touchcorp side of the business provides the Touch System Platform, which the company says offers advantages including fraud protection, regulatory compliance, and data collection and analysis.<\/p>\n Afterpay’s algorithms assess the shopper’s repayment capabilities and risk of fraud automatically and in real time.<\/p>\n The company holds an Australian Credit Licence, even though it is not required to given it does not charge interest or fees and its credit duration is a relatively short 56 days.<\/p>\n The rapid repayment cycle means that every $100 in capital deployed generates about $57 of revenue<\/strong> over the course of 365 days, assuming returns are reinvested.<\/p>\n Underlying total transaction volumes hit $2.2bn<\/strong> in the December quarter of 2017, five times the level of a year before.<\/p>\n End-customers more than tripled over the same period to about 1.5m and merchant numbers grew by 450% to 11,500.<\/p>\n Brokers optimistic on underlying growth trajectory<\/u><\/strong><\/p>\n Afterpay closed at $7.71 on January 30, a nudge up from its January 16 close after the Matrix announcement.<\/p>\n Stockbroking analysts covering the stock remain highly optimistic about prospects, to say the least, tipping a rise of 20% to 40% for the shares over the coming year<\/strong>.<\/p>\n Wilsons' forecast might serve as a broad gauge for the optimism expressed across the board: “2017 was a stellar year for APT. We believe momentum will continue in 2018.”<\/em><\/p>\n The broker recently reiterated its Buy recommendation and raised its 2018 target price to $10.41, suggesting 39% in total shareholder return.<\/p>\n Bell Potter also maintained its Buy call, raising its target price to $9.20 from $7.30. Bell factored in some costs from the US expansion, while holding off from including any revenue until the company provides more detail.<\/p>\n Ord Minnett initiated coverage with a Buy recommendation and a target price of $9.50, citing Afterpay’s “high uptake velocity, as the network effect continues to drive more retailers to offer the product, therefore allowing more consumers to use it more frequently.<\/em>”<\/strong><\/p>\n Afterpay facilitated 8% to 9% of online sales in Australia in the December quarter. Its service is now offered in 5,000 shopfronts, which contributed 8.5% of the sales mix in December.<\/p>\n Bell Potter notes that although Afterpay does not use a traditional lending model, it “is still exposed to the risk of default or a loss of principle”<\/em><\/strong> and the ability of its technology to prevent fraud and recover bad debt is crucial to the company’s viability.<\/p>\n US ecommerce market promises big wins<\/u><\/strong><\/p>\n Having already had a stellar run on the ASX, on January 16 Afterpay announced a partnership with US tech-focused venture capital firm Matrix Capital Partners, which will take a strategic stake in the company and advise on its US expansion.<\/p>\n Matrix General Partner Dana Stalder, who has held senior roles at eBay and Paypal, will join the Afterpay board as an independent non-executive director.<\/p>\n Matrix will invest US$15m in equity, in the form of 2.88m shares at $6.51 per share, with escrow periods of three and seven years. As well, new subsidiary Afterpay US Inc will issue US$100,000 in convertible notes to two funds managed by Matrix. The notes will convert to up to 10% of the future value of the company in excess of US$50m when the conversion period rolls around in 5 to 7 years’ time.<\/p>\n Wilsons quotes FTI Consulting’s estimate that online e-commerce activity in the US was worth US$445bn in 2017, up 12.7% on 2016, adding: “This opportunity appears to be at least 20 times the size of the Australian online retail market.”<\/em><\/strong><\/p>\n Afterpay listed in May 2016 with Touchcorp as a 35% shareholder. The shares rallied 30% within the first week of listing, immediately capturing the attention of investors. The stock has not fallen off the market's radar since.<\/p>\n<\/p>\n
\n-Partnership with seasoned tech-focused venture capital firm underpins US strategy
\n-Analysts tip rise of 20% to 40% in Afterpay shares over the coming year<\/strong><\/p>\n