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Top broker thinks Afterpay shares could hit A$44.50 in the mid-term

Though Citibank looks to be optimistic about Afterpay’s growth story – increased investment costs, steeper competition and regulatory overhang all remain important factors for investors to consider.

Citibank has today initiated coverage of the high-flying tech darling Afterpay, rating the stock as neutral and hitting it with a base case price target of A$33.70.

At Afterpay’s (ASX: APT) current share price, such a forecast would imply potential upside of around just 2.0%.

Yet it was Citibank’s bull case, which argues that Afterpay’s share price could run as high as A$44.50 in FY22e that proved maybe the most interesting.

Below we take a look at both Citibank’s base and bull case for the young company.

Afterpay share price: growth continues

Citi’s base case involves an assumption that actually comes ahead of Afterpay’s own aggressive forecasts. Namely, the investment bank is of the opinion that Afterpay could achieve underlying sales of A$26 billion by FY22 – roughly A$6 billion ahead of Afterpay’s own estimates.

This rests on the central idea that Afterpay will increase its market penetration, see increased use from existing customers and potentially expand into new markets – with Citi citing Canada, as a key example.

While on the face of it this outlook may appear optimistic, it is underscored by comments that investors may be underestimating the costs Afterpay is likely to incur as it pursues an aggressive growth agenda.

In addition to this, regulatory issues – such as the ongoing AUSTRAC investigation and increased competition, from Klarna primarily – have also contributed to Citi’s base case price target of A$33.70.

This, investors would do well to remember, is just a shade ahead of the company’s current share price.

Could Afterpay shares run even higher?

Though Citi’s base case implies little upside on Afterpay’s (ASX: APT) current share price – it’s bull case suggest there is still modest room for the A$8.3 billion company to run.

Centrally and based on the idea that Afterpay could replicate its ANZ success in the UK and US – as well as achieve underlying sales of A$35 billion in FY22e – Citi has set a medium-term bull case price target of A$44.50 (FY22e).

Such a position seems to echo the investment thesis put forward by Watermark Funds Management in a recent Livewire article.

Here, Watermark’s Harry Dudley noted that their fund believed Afterpay could hit A$34 billion in underlying sales in FY22.

This view was based ‘on a conservative set of assumptions and has the potential to even double guidance in a favourable US/UK scenario.’

Though slightly less aggressive than Citi’s underlying sales estimate – it looks to suggest that general optimism around the company remains high.

Final thoughts

This increasing bullishness around the young company from investors and brokers is hardly surprising when you consider Afterpay’s recent share price momentum.

After all, year-to-date Afterpay (ASX: APT) has seen its stock rise from around just A$12.00 at the start of January, to around A$32.02 today – a substantial 175% increase.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material 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 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. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research 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.

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