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Why the Afterpay share price is down over 7%

Tristan Harrison
Share prices down

The Afterpay Touch Group Ltd (ASX: APT) share price is down 7.3% at the time of writing, with the buy now, pay later operator suffering from the share market falls.

Overnight the S&P 500 Index (INX) fell by almost 3% on worries that US President Trump’s trade war with China could turn into a full-on recession for the US which would then have effects across the world.

We’re already seeing the German and Chinese economies slow to the lowest levels of growth for many years.

With interest rates being driven so low by central banks like the Reserve Bank of Australia (RBA), investors were pushed into riskier assets to try to find some sort of return. But, it’s these higher-growth, higher-risk assets such as Afterpay shares that investors might try to sell first, which is why high-growth asset prices fall harder on days like today. 

Afterpay could be hit by a double-whammy because most of its underlying sales are linked to discretionary spending like clothes and other products. If the Australian economy were to suffer a slowdown then it’s quite likely that Afterpay’s sales would face a decline, or at least a growth slowdown, too.

Indeed, it’s the US economy that has a lot of global investors worried. The US is where a lot of Afterpay’s growth hopes are pinned. Investors may need to lower their growth expectations in the US if an American recession were to eventuate.

But that’s not the only reason why I’m concerned about Afterpay’s growth. There’s a lot more competition these days. Zip Co Ltd (ASX: Z1P), Splitit Ltd (ASX: SPT), Sezzle Inc (ASX: SZL), FlexiGroup Limited (ASX: FXL) and now Klarna – the provider that’s linked with Commonwealth Bank of Australia (ASX: CBA).

Foolish takeaway

Despite the harsh share price fall today, Afterpay is still trading at 82x FY21’s estimated earnings. Time will tell whether today is actually a good price to buy at or not, but I’m certainly not convinced it is. I can think of better opportunities. 

I’d much rather buy shares of one of these hot stocks for my portfolio which have clearer paths to long-term profit growth in my opinion.

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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 ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. 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. 2019