Afterpay share price plunges 7.2% on bearish UBS report

How much longer does the Afterpay growth story have left to run?

The reaction was sharp and immediate.

Afterpay (ASX: APT), the fast rising market darling saw its share price drop off a cliff today, as a bearish broker note from UBS triggered a mini investor exodus.

By the late afternoon APT had fallen about 6.5% but ended out the session at A$33.92 per share, some 7.2% lower overall.

Afterpay share price: the UBS take

The crux of the report: competition, execution risks and regulation all pose a threat to Afterpay’s stratospheric growth prospects.

Considering all this, UBS hit the stock with a ‘sell’ rating and placed a price target of A$17.25 on the young company.

UBS also put a ‘sell’ rating and a price target of A$4.80 on Afterpay rival Zip.

Regulation

Regulation looks to be one of the key concerns here, with a significant portion of the people that UBS surveyed, as part of its 'Evidence Lab', viewing Afterpay’s BNPL offering as ‘credit’; a title that Afterpay has itself long fought against.

Such a view – coupled with Afterpay’s intense popularity – could prove a catalyst for increased regulatory scrutiny in the buy now pay later space (BNPL), thinks UBS.

Moreover, given that Afterpay is currently 100% concentrated in BNPL, UBS further points out that it looks to be the most susceptible to regulatory risk – opposed to the likes of Zip, whose operations are less concentrated.

Valuation

Second, Afterpay’s share price – at its current price levels – already has significant levels of growth priced in. Projecting well into the future, UBS believes Afterpay would require GMV figures of A$175 billion by the 2030 fiscal year, to justify its share price.

Afterpay (ASX: APT) itself is targeting around A$20 billion GMV by FY22.

Competition

Finally, UBS also worries that low barriers to entry in the BNPL space could pose a problem for Afterpay going forward.

Whiffs of competition have indeed generated bouts of investor skittishness in the past. When VISA first announced plans to enter the instalments payment space in July – investors bid APT’s stock down in short order.

Funnily enough, VISA has actually since partnered with Afterpay and investors have seemingly all but forgotten about the payment behemoth’s intended foray into the space.

Noting all this, bearishness is probably an understatement when you consider that Afterpay’s share price crossed the $37 mark just this Tuesday.

In saying that, at least the UBS take gives a little bit of variance to the broker outlook. Afterpay’s stock after all has been on a tear in recent months: in August it traded for just A$22. FY19 results which saw GMV figures run past A$5 billion and then a string of broker reports that pegged Afterpay as outpacing its own GMV predictions helped it run to all-time-highs.

Morgan Stanley just yesterday released a broker report pitching Afterpay as a potential A$44 dollar stock.

Goldman said approximately the same thing – hitting APT with a A$42.90 price target in recent times. Afterpay’s shares kicked-up 14% on that report alone and the ASX issued a ‘please explain' notice.

Will they do the same thing now one wonders?

Scott the ‘WeWork IPO killer’ Galloway weighs in

UBS is trailing the market somewhat in their Afterpay ‘could crash’ thesis. For those not in the know, Galloway recently came to fame for his contrarian take on the WeWork prospectus. WeWork has since shelved its IPO indefinitely as it works through a number of issues.

Indeed, Scott Galloway just last week came out with the now slightly-less-audacious prediction that ‘these stocks [of Buy Now Pay Later firms] will likely be halved in the next 12 months as visa rolls out its product.’

UBS is now on the bearish bandwagon it would seem. Of course, traditional valuation metrics would indeed tell you that Afterpay is richly valued – with the company carrying a hefty price-to-sales ratio of 26.68, according to the Wall Street Journal.

Whether Afterpay can keep pace with its valuation however is another story entirely.

It will be interesting then to see how this plays out over the next 12-months.


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