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Why the Afterpay Touch Group Ltd (ASX:APT) share price rally may not be good news for shareholders

Brendon Lau

The share price of Afterpay Touch Group Ltd (ASX: APT) is rocketing ahead despite fresh allegations that many of its “buy now, pay later” millennial customers are under financial stress.

The stock surged 5.7% to $15.85 in morning trade – making it the best performer on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index and leaving other outperformers like tech superstars Appen Ltd (ASX: APX) and WiseTech Global Ltd (ASX: WTC) in second and third spot, respectively.

You can attribute the bounce to a relief rally after its share price collapsed by a quarter in just two weeks as the market sell-off has hit high price-earnings (P/E) stocks the hardest.

The Australian Financial Review’s step up in its attack on Afterpay today isn’t enough to keep the bargain hunters at bay, although shareholders like myself may be a little disappointed with the recovery.

Don’t get me wrong, I want to see a higher share price – just not right now as Afterpay is about to enter into a “price setting” period for its share purchase plan (SPP).

The SPP, which is intended to raise around $20 million, comes on the back of a $117 million share placement to sophisticated and institutional investors. These big investors are paying $17.05 per new share under the capital raise and I love the idea of being able to purchase my allocation of new shares at a steep discount.

Under the SPP, retail shareholders will pay the lower of $17.05 or the five-day volume weighted average price (VWAP). The VWAP price will be determined in the five days to when the offer closes. This means a period between tomorrow and next Monday (11 to 17 September).

This was why I was delighted to see the share price of Afterpay crash, but I have a feeling the stock is heading up from here, in spite of the AFR’s best efforts.

In the latest attack, the paper highlighted a survey by financial comparison website Mozo on 1,000 Afterpay customers, which found that a quarter of them were suffering financial stress.

Afterpay rejected these findings as it pointed out flaws and inaccuracies in the survey. The company was also quick to point out that 94% of its business is from repeat customers who do not have any overdue amounts.

Questions about the creditworthiness of its young consumers demanding immediate gratification are not new. There is also speculation that Australian regulators are considering imposing rules to this segment of the credit market, although this is far from a certainty.

I have also wondered about the impact of the growing popularity of these services on the latest better-than-expected GDP data that was bolstered by household spending.

But I have little doubt that the buy-now, suffer-later service will catch on in a big way both in Australia and overseas.

As it stands, Afterpay is probably the best way to gain exposure to this thematic, even though it has rivals like Zip Co Ltd (ASX: Z1P) and FlexiGroup Limited (ASX: FXL).

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Motley Fool contributor Brendon Lau owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO, Appen Ltd, and WiseTech Global. 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.