Afterpay shares: top broker initiates coverage with a $38 price target

Macquarie Wealth Management has initiated coverage on Afterpay (ASX: APT) with an OUTPERFORM rating and a significant $38 per share price target.

It seems like a lifetime ago that Afterpay was a sub-$10 stock.

The fast-moving buy now pay later (BNPL) company currently trades at $28.78 per share – some ways off its 52-week high, but still 139% ahead of where it did in January.

Recent news coverage concerning the company’s 2018 US Equity Plan may have rattled investors, if only a little bit.

Nevertheless, some of Australia’s top brokers don’t seem too worried, which save for a bearish UBS analysts – looks to represent a mostly bullish consensus.

Illustrative of this, yesterday Macquarie Wealth Management initiated coverage on Afterpay (ASX: APT) – hitting the fast-growing (BNPL) company with an OUTPERFORM rating and a 12-month share price target of $38.00.

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Afterpay share price: the growth story grows

Though Afterpay is already a dominant player in Australia’s BNPL space, it is North America that represents the true growth opportunity.

Here, Macquarie points out that APT is already emerging as a leading player in North America’s BNPL space, a market that the investment bank estimates to be 18-20x the size of Australia’s. That fact, as well as a number of other growth levers, including: in-store penetration, category expasion and a push into new markets all mean that Afterpay’s runway for growth remains high.

In line with this, Macquarie expects Afterpay to hit $26bn in underlying sales (GMV) by FY22 – some $4bn ahead of Afterpay’s own GMV estimates.

Longer-term, Afterpay could achieve underlying sales of $70bn, thinks Macquarie.

Yet as with any good piece of stock analysis, the investment bank is quick to highlight the risks faced by Afterpay – a company operating in a fast-evolving sector, where barriers to entry are low and well-capitalised players may soon make aggressive moves to capture market share. VISA Next represents one such well-capitalised player with BNPL ambitions.

On the other hand, though barriers to entry are low, Macquarie posits that the consumer side of Afterpay's business model does have a number of areas which represent points of differentiation. These include: branding, value fit and availability of APT's payment solutions.

On the merchant side, access to Afterpay’s expansive and engaged customer base, an easy-to use product and global reach all rank as key differentiators, notes Macquarie.

And maybe this is the most important part of the Afterpay equation. As Macquarie describes it: Afterpay benefits from a ‘two-sided’ network effect.

That is, as more retailers offer Afterpay, the more valuable the product becomes for users. With this increased value for users, the value for retailers grows in-step. Indeed, the availability of APT often has the effect of stimulating top-line growth for merchants.

Afterpay exacerbates this growth equation with highly-targeted marketing and strong partnerships, among other strategies.

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