Afterpay share price outlook: How 3 Top brokers currently view the stock

We briefly look at Afterpay’s first quarter results as well as examine how three of Australia’s top brokers reacted to this business update.

Afterpay share price remains elevated following Q1 update

Afterpay continues to trade confidently above the $100 handle – following the release of its first quarter FY21 results last week – opening Thursday’s session at $103.40 per share. At this level, the company has an implied market capitalisation of close to $30 billion – putting Afterpay ahead of a number of ASX-listed heavyweights, including: mining giant Newcrest Mining, iconic supermarkets chain Coles Group and even Woodside Petroleum.

If the market seems to be inferring one thing from the company’s latest quarterly results – it’s that Afterpay and companies like it represent the future of the ASX – and that companies like Coles and Woodside may potentially represent its past. Whether such a view holds up over time remains to be seen. Many have indeed questioned Afterpay’s valuation and after running up over 200% YTD, APT does indeed trade on a stratospheric 51x sales multiple – suggesting the stock is ‘priced to perfection.’

Regardless of such considerations, Afterpay posted a strong set of Q1 FY21 results. The broad strokes of the Q1: The company is continuing to see robust underlying sales momentum, customers and merchants continue to join the Afterpay ecosystem, and merchant and net transaction margins remain low and defaults steady.

On a more granular level, for the quarter ending September 30, Afterpay reported:

  • Underlying sales of $4.1 billion, up 115%
  • Total customers of 11.2 million, up 98%
  • Total merchants of 63.8 thousand, up 70%
  • That ANZ users transacted with the platform a staggering 54 times annually

Elsewhere, Afterpay told the market that it had entereted into a partnership with innovative payments company Stripe – in a move that the company said will 'allow its millions of [Stripe] users to quickly and seamlessly offer Afterpay to their customers.' Morgan Stanley analysts suggested that this partnership 'should help retailers connect to APT.'

Read our deep dive into Afterpay’s Q1 FY21 Business Update here.

Bulls VS Bears: The analyst wrap

With the market positively reacting to Afterpay’s latest business update, below we take a brief look at how a number of key analysts responded, including UBS, Bell Potter and Morgan Stanley.

UBS

Analysts from the Swiss investment bank remain the odd ones out when it comes to their view on Afterpay – reiterating a Sell rating and $28.25 price target following the release of the company’s Q1.

Regardless of this, it was conceded that ‘Higher than forecast transaction frequency in ANZ has Afterpay tracking ahead of UBSe underlying sales forecasts in 1H21 given transaction frequency in the seasonally strong December quarter should increase.’

Despite that, the investment bank has retained a bearish stance on the BNPL disruptor, reiterating some of the key risks currently facing Afterpay including, increased regulation, increased competition and funding risks.

Competition is likely to be a key focus for the market in the short and medium-term, with global payments titan PayPal recently entering the BNPL space. PayPal’s Chief Executive Officer and President, Daniel Schulman, recently told analysts during PayPal’s Q3 conference call that they had already seen early success from the launch of their BNPL – Pay in 4 – product, saying:

‘We rolled this out in France several months before we introduced this into the U.S. and then into the U.K., and the uptake that we are seeing in the French market is well beyond any of our expectations.’

‘And we just rolled out in the U.S. and the demand is tremendous.’

Beyond that, UBS said APT’s US sales and customer growth figures are tracking in line with its estimates.

Bell Potter

Australian broker Bell Potter delivered a diametrically opposed view to UBS in the wake of Afterpay’s Q1 – raising their price target on the stock from $121.00 to $137.00 per share, while keeping their Buy rating unchanged.

Overall, the broker noted that: ‘APT has delivered another strong quarterly update ahead of what will be an acceleration into the Christmas shopping period with evidence of an uplift in customers already showing.’

Bells went on to describe the Stripe partnership as both a growth and defence strategy that will potentially help Afterpay deal with coming competition, for example, Paypal’s entrance in the BNPL space.

Looking at the fundamentals, Bell Potter analysts were impressed by Afterpay’s Q1 net transaction margin performance, which the company itself described as having been maintained from the quarter prior.

‘This better than expected margin has led to a material increase in underlying EPS and is a further endorsement of the model,’ Bells said.

As a result of this, the broker lifted its underlying EPS estimates by 27.8%, 15.0% and 10.7% across FY21-23.

Morgan Stanley

Morgan Stanley, though not as bullish as Bell Potter, remains optimistic about Afterpay’s prospects, reiterating an Overweight rating and $115 price target.

Analysts from the investment bank said the Q1 was: ‘modestly ahead of our forecasts and broadly in line with consensus,’ while positively noting that ‘Momentum is accelerating into 2Q21 on new merchant sign-ups in the US, the Stripe partnership should assist growth and referrals are growing.’

Morgan Stanley went on to say that Afterpay's underlying sales came in ~$100 million ahead of the investment bank’s estimates, noting that APT's 'more mature ANZ region drove the beat.'

Mind you, while Afterpay beat on underlying sales expectations, it lagged behind the investment bank’s customer growth estimates, reporting total customers 11.2 million against Morgan Stanley’s 11.3 million estimate, implying a 4% miss.

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