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In a speculative bubble, it is always dangerous to call a “high” and label a stock a “sell”. But when two top tier broker analysts have such different valuations on a company, it is hard not to believe that a high can’t be too far off or may have already been witnessed.
That’s the case for the highflying Afterpay (ASX: APT). Morgan Stanley says it is a ‘buy’ and has a target price of $101.00, while UBS has a ‘sell’ and a target of just $27.00. They both can’t be right!
Maybe it is unfair to label “the buy now, pay later sector” a speculative bubble, but what brought this home to me last week was a simple comparison on some of the key metrics between Afterpay and European market leader, Klarna.
Klarna, of course, has launched in Australia in partnership with the Commonwealth Bank. It is going “okay” in Australia (probably not as good as the Bank may have anticipated) and after six months, boasts 270,000 customers and 80 live merchants (including kogan.com, appliances online and Roses Only).
Internationally, it is a different story for Klarna. 85 million customers, $750m in revenue for the last half, and in the key US and UK markets, it grew by 350% and 125% respectively year on year.
Afterpay, on the other hand, has 9.9m million customers, generated gross revenue for the half ending 30 June of around $300m, and in the US market, grew by 330% year on year. Afterpay added 2.6m customers globally in the last half year, Klarna added more than 14m.
Afterpay’s market capitalisation on the ASX sits just shy of $20bn. When CommBank invested US$100m in Klarna in August 2019 and a further US$200m in January 2020, Klarna was valued at US$5.5bn (approx. A$8bn). Klarna is an unlisted company and if it undertook an IPO, it could be worth considerably more. And the market for online tech darlings is hotter now in July than it was in January.
However, for an eighth of the customers, 40% of the revenue and a comparable growth rate in the key US market, Afterpay is arguably 1.5 to 2.0 times as expensive. Either Klarna is a screaming buy, or Afterpay is way too pricey.
Locally, Klarna’s sales model is for online purchases, whereas Afterpay grew up on in-store sales and offers both instore and on-line. With more than 41,000 merchants, it dwarfs Klarna’s penetration, but the latter will be looking to its partner CommBank to roll out an integrated offering to its merchant base of circa 100,000 customers. Both Afterpay and Klarna allow customers to pay off their purchases in 4 equal instalments, two weeks apart. No interest is charged, but a late fee is levied if the payment is missed.
One important difference between the models is that Afterpay doesn’t do a credit check on its customers, whereas Klarna and fellow competitor Zip (ASX: Z1P) do. Some industry commentators argue that under the guise of ‘responsible lending’, it is inevitable that the regulator ASIC requires this to happen and say that Afterpay’s failure to do so will come back to haunt it.
Zip’s operating model is more akin to the provision of a line of credit. Although no interest is charged with Zip Pay, a monthly account fee of $6 is levied on the customer for so long as there is a balance outstanding. Up to a credit limit of $1,000, the monthly instalment is $40 per month. For purchases (limits) over $1,000, Zip offers Zip Money (which potentially charges interest after 3 months). Because Zip’s transaction size is higher on average than Afterpay and the customer is also paying a fee, merchant fees (as a percentage of the transaction value) are lower.
After bottoming at $8.90 on March 23, Afterpay has soared to over $70. A key catalyst was news that Chinese tech giant Tencent had acquired a 5% interest in the company. A very well supported capital raising at $66 per share in July, which raised $650m, has provided a temporary floor.
Zip, which has a market cap of around $2.3bn, has also experienced a rapid climb since its March lows. The all scrip acquisition of US buy now, pay later provider QuadPay in early June was a strong catalyst.
What do the brokers say?
In the main, the brokers see Afterpay as fully priced. There is, however, a huge divergence in opinion, with UBS the “bear” with a target price of just $27.00, while Morgan Stanley is the “bull with a target price of $101.00. According to FN Arena, the consensus target price is $67.92, a 0.9% discount to Friday’s closing price of $68.54. Individual broker recommendations and target prices are shown in the table below.
Afterpay (APT) – Broker Recommendations and Target Prices
Fewer brokers cover Zip, but the three majors who do are collectively more bullish on Zip than they are on Afterpay. Overall, the consensus target price is $6.45, an 8.4% premium to the closing price on Friday of $5.95.
I will stick my neck out and call Afterpay a “sell”.
On “value” grounds, Zip looks a better bet. However, I am wary of recommending the “number two” in a market place and if Afterpay heads south, I can’t see Zip heading in the other direction.