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Is the Afterpay share price a buy right now?

Tristan Harrison
APT shares

Is the Afterpay Touch Group Ltd (ASX: APT) share price a buy right now? It has defied most expectations by flying to a share price of around $40.

Its business growth has been truly impressive. In the first five months of FY20 Afterpay saw total underlying sales of $3.7 billion. At the end of November it had 6.6 million active customers with an average 22,000 joining per day in November. These are incredible numbers. 

At 30 November 2020, Afterpay US had a customer base (of more than 3 million) equivalent to Australia and New Zealand after 19 months since launch. In the UK it had grown its active customer base to 500,000 after seven months since launch.

The attractive thing about Afterpay’s customer growth is that the longer a customer is around the more times they purchase. The customers who joined during FY15 to FY17 are now purchasing on average 22 times a year, FY18 joiners are purchasing 14 times a year and FY19 joiners are purchasing seven times per year.

I think one of the most important things to monitor, aside from profitability metrics like the net transaction loss, is the group merchant revenue margin. There has been a lot of commentary about how Afterpay charges merchants a fairly high fee, which merchants aren’t allowed to directly pass onto customers (yet). The RBA may change the rules, we’ll see what happens this year. 

If Afterpay’s merchant margin falls then (future) profit generation would obviously be lower. There is a large amount of growth and profit expectations built into the current $40 share price. But a business has to make good profit at some point to show it’s worth what the market currently thinks it’s worth.  

Foolish takeaway

Afterpay is trading at 73x FY22’s estimated earnings. There is such a wide degree of variables and outcomes with Afterpay that make it hard to know if it would be a good buy today. Plus, don’t forget about all of the competition which is also growing at a fast pace. 

The post Is the Afterpay share price a buy right now? appeared first on Motley Fool Australia.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020