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Why Citibank slashed their Afterpay price target by 50%

In typical Afterpay style, the buy now pay later leader saw its share price open some 33.8% higher today.

Afterpay share price Source: Bloomberg

The ten bagger opportunity that was

Late last year, when UBS revealed its Sell rating and $17.25 price target on Afterpay (ASX: APT), many bullish investors surely had a good laugh.

At the time, Afterpay was after all, the tech darling that could do no wrong. Bolstered by a two-sided network effect of willing merchants and eager users, the young fintech was ratcheting up growth quarter after quarter.

Its share price benefitted too: between its listing in July 2017 and up until February 2020, the Afterpay share price rose in excess of 1,100%.

Afterpay share price: a developing thesis

The story of course, it somewhat different right now. Though for the sake of consistency at least, the stock has continued to trade in a volatile fashion, with the Afterpay share price opening 33.8% higher today.

Brokers however, may be becoming less convinced, as the lustre of a company leveraged heavily to discretionary spending and a potentially severely impacted demographic, wears thin.

Indeed, as Citibank wrote this week:

‘We expect uncertainty regarding the extent of decline in consumer discretionary spending (and timing of the recovery) and whether Afterpay can navigate through a credit cycle to be overhangs for the stock over the next 3-6 month.’

Such ‘overhangs’ have seen Citibank aggressively cut their price target on Afterpay from $42.20 to $21.10 per share. Given the near term earnings risk, the investment bank’s rating has also slightly shifted, from Buy to Buy/High risk.

With such steep share price swings apparently on the cards, the stock appears high risk indeed!

Ultimately, as the coronavirus crisis seeps further into Australia’s economy (and other key Afterpay markets), the investment bank posits that both APT's merchant sales and net transaction margins will be likely come under pressure.

Positively at least, according to Citi:

‘Unlike other unsecured consumer credit products, the key advantage to Afterpay is the low duration (<30 days) and that Afterpay dynamically change its credit variables on a per order basis. These characteristics should allow Afterpay to identify credit issues early and control losses.’

And for those wondering if Afterpay will be able to weather the current economic uncertainty we are now facing, according to Citibank the answer is yes. Not only is Afterpay’s capital position strong, but a stress test conducted by the investment bank suggests that APT is 'able to withstand a material increase in customer losses and/or reduction in GMV.’

Watch this space.

How to trade Afterpay

Are you bullish or bearish on Afterpay? Trade accordingly. You can use CFDs to trade Afterpay and other growth stocks – LONG or SHORT through IG’s world-class trading platform now.

For example, to buy (long) or sell (short) Afterpay, follow these easy steps:

  • Create an IG Trading Account or log in to your existing account
  • Enter 'Afterpay' or 'APT' in the search bar and select it
  • Choose your position size
  • Click on ‘buy’ or ‘sell’ in the deal ticket
  • Confirm the trade

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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