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Afterpay share price: where next as ‘dilution’ concerns emerge

As Afterpay pursues an aggressive global growth agenda, we examine the impact it is likely to have on the company’s current shareholders.

Make no mistake: growth always has a price.

The problematic part of this equation arises from the fact that said price is often not immediately quantifiable.

For example, when A2 Milk’s esteemed and now ex-CEO – Jayne Hrdlicka commenced a growth-focused marketing blitz with the aim of cracking China’s IMF market – few would have thought it would have contributed to her down-fall.

Yet it’s been speculated that Hrdlicka was ousted from A2 precisely for being too aggressive in her pursuit of China.

For many the prospect of future dominance may have been too far-off. The A2 board after all, suggested it wanted a more delicate balance between growth and profitability.

Afterpay looks to have no such reservations.

Afterpay share price: winner takes all

Looking at the fervent growth of the buy now pay later (BNPL) sector across the globe; Afterpay has pushed hard to reward its employees, aggressively raise capital and attract world-class talent to further its global ambitions.

In the shadows of Silicon Valley giants: present profits are being sacrificed for future market dominance.

And so far it’s working: Afterpay’s share price is up 140% YTD and the company now boasts 6.6 million active customers across the globe.

Delving into the impact of this growth, yesterday the market darling provided further clarity around its US subsidiary’s 2018 Equity Incentive Plan.

Here, it was reiterated that under this Equity Plan – Afterpay’s North American arm 'may offer options which give eligible participants a right to acquire common stock (or shares) in Afterpay US.’

At least it was noted that the exchange of shares issued under the above Equity Plan, generally speaking, cannot be exchanged for ASX-APT shares before January 2023.

Looking at the current state of this Equity Plan, there are currently 7,788,234 US options on issue and 3,195,561 exercised shares that are fully vested.

Yet possibly the most relevant point of today’s media release was the explanation that the maximum number of APT shares that can be issued under this Equity Plan cannot exceed 21,777,661 ASX-APT shares.

With 260.52 million Afterpay shares currently outstanding, such a figure would represent approximately 8.3% of APT’s current shares on issue.

In saying that, and likely to the relief of investors fretting over dilution concerns, it was pointed out that 'the company considers it unlikely that the maximum number of APT shares would be issued because for this to happen it would necessarily mean that the value of APT (excluding the US business) is negligible or very low in comparison to the assessed value of Afterpay US, Inc.’

Comforting maybe; the Australian Financial Review still ominously commented that:

‘Afterpay investors know some sort of dilution is coming. They just don’t know how painful it will be.’

The Afterpay share price currently trades at $28.79.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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