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How much should you really pay for Afterpay shares?

Sebastian Bowen
Businessman paying Australian money

One of the biggest winners of 2019 was undeniably the Afterpay Ltd (ASX: APT) share price – formerly known as Afterpay Touch Group.

Afterpay shares started 2019 at around $12 per share. By year’s end, the market was asking $30.63. It’s not often an ASX share more than doubles in 12 months, but at one point in 2019, Afterpay had tripled. The Afterpay share price has since settled down somewhat and is going for $33.24 at the time of writing

Having a stock that has banked such an impressive gain in so short a time probably begs the question – how much should we be paying for APT shares? Were they undervalued at $12? Are they overvalued at $33?

Well, a company’s shares are traditionally ‘valued’ by using the price-to-earnings ratio metric (a company’s share price dividend by the company’s earnings per share). This is a little tricky in Afterpay’s case as the company has yet to generate any earnings per share (or at all) – at least earnings that are positive.

So there goes that option.

So let’s look at some other numbers.

There’s no sugar-coating this one: Afterpay lost $20.71 million last year, which equates to around 19 cents per share.

Despite this, total income for the company grew from $116.8 million in FY18 to $251.6 million in FY19. Underlying sales for FY19 came in at $5.2 billion, which was up from $2.2 billion in FY18. So things on the balance sheet are at least going in the right direction.

But what of the price?

At $33.24, Afterpay is valued at $8.66 billion. If we were to assign the current market average price-to-earnings ratio of the S&P/ASX 200 (INDEXASX: XJO) of 19 to Afterpay at the current share price, it would need to have earnings of around $456 million. Last year (as we discussed earlier) Afterpay’s earnings were negative $20.71 million.

So I think its fairly safe to say that Afterpay is overvalued if we were to assume earnings weren’t going anywhere. But fortunately for APT shareholders, they are. However, if you are wishing to invest in Afterpay today, I would strongly suggest estimating when the company is likely to get to anywhere near $456 million in earnings – and adjusting your buy price accordingly.

If you think it will get there in, say, 2 years time and then continue onwards and upwards from there, Afterpay is probably a screaming buy. But if you think it will take 10 years – it might do better to wait for a share price dip, to say the least.

The post How much should you really pay for Afterpay shares? appeared first on Motley Fool Australia.

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Sebastian Bowen 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