Afterpay Touch is a dominant player in the rapidly expanding 'Buy Now, Pay Later' market. The company provides point-of-sale financing to consumers, both online and in-store, allowing them to repay the funded amount over eight weeks and charging no interest or fees, other than late fees. It also increases sales – especially online basket conversion – for participating retailers. Revenue is generated from a merchant fee, which averaged 4.1% in FY17.
We have initiated coverage of Afterpay Touch with a Buy recommendation and a $9.50 target price. Our investment case is based on the following factors:
- Its market-leading position, as it now facilitates about 9% of all online sales in Australia;
- High uptake velocity, as the network effect continues to drive more retailers to offer the product, allowing more consumers to use it more frequently;
- A highly scalable business model, with significant market potential, especially as the company takes further steps to diversify geographically;
- Its funding position, with its existing facilities able to support an annualised sales rate of $4.4bn; and
- Its strong management team, led by the two co-founders, each holding a significant stake in the company.
Afterpay Touch was one of the early movers in the Buy Now, Pay Later online offerings, and this has seen it establish a leading market position. On each of the key metrics – underlying sales, number of merchants and number of customers – the company’s Australian business is comfortably ahead of its competitors. In the short term, we believe its earnings will be driven by continued penetration into the online retail segment in Australia and New Zealand, while its longer-term plan to expand into the US has significant potential.
The key risks to our investment thesis include: 1) credit risk relating to default by consumers; 2) growth in underlying sales below our expectations; 3) competition risk; and 4) regulatory risk.