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CFDs are complex instruments. 70% of retail client accounts lose money when trading CFDs, with this investment provider. You can lose your money rapidly due to leverage. Please ensure you understand how this product works and whether you can afford to take the high risk of losing money.

Why UBS just downgraded Afterpay to Sell

We examine why the Swiss banking giant UBS today downgraded Afterpay (APT) from a Neutral to Sell rating.

Afterpay share price in focus Source: Bloomberg

When something is described as being priced in, in the case of a stock for example, that is to simply say that its price reflects all the relevant pieces of information and expectations.

This was one of the explanations given as to why US equity markets rose last Thursday – even after the release of disastrous jobs data, which saw an additional 6.6 million Americans apply for unemployment.

Bad news yes. But bad news that was already factored in by market participants before its release, apparently.

Afterpay share price: rose tinted glasses

Did the new information investors gleamed from Afterpay’s Q3 business update really justify a 30% increase in value? The market seemed to think so.

On Tuesday, the Afterpay share price finished the session out at $28.40 per share, up precisely 29.091% for the day.

UBS analysts, even in lowering their rating on Afterpay from Neutral to Sell today, didn’t think APT’s quarterly was that bad either. In fact, the investment bank described it as ‘strong’, noted that Afterpay likely wouldn’t need to raise capital anytime soon and said that the company’s liquidity positioned had improved in recent times.

Of course, positive points aside, UBS is not optimistic about Afterpay’s prospects in the current environment. The thrust of their argument is that the risks stemming from the coronavirus (Covid-19) are no longer accurately priced into the Afterpay (APT) share price.

‘At the current share price, we believe the market is looking through the near-term impact of COVID-19,’ UBS analysts said.

Describing that near-term impact, UBS sees this uncertainty potentially manifesting itself as a rise in bad debts, less frequent use the service, the decline of customer growth, and maybe most interestingly, an ‘impairment to L-T customer assumptions.’

Of course, UBS analysts have leaned bearishly towards APT for some time now, not just in the wake of emerging short-term uncertainties. Indeed, unlike a seemingly large portion of the market – UBS doesn’t treat Afterpay as a trendy, tech disruptor in the vein of a Google or a Facebook – but as a much more pedestrian consumer lending company.

‘We fundamentally view APT as an unsecured consumer lending business that is trading at ~9x book equity (FY20E) in the lead-up to a severe recession or possible depression,’ said UBS analysts.

It is such a view, coupled with the investment bank’s other concerns, that explains the significant divergence between APT’s current share price of around $27 per share; and UBS’s current bearish 12-month price target of just $13 per share.

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