Afterpay share price: will the bulls or bears win in 2020?

We examine where two top investment banks think the Afterpay share price will head in 2020.

Afterpay share price: recent moves

During the last five sessions the Afterpay (ASX: APT) share price rose around 5% and currently trades at the $30.46 mark. Longer-term, the last six months have proven to be a tumultuous period for Afterpay investors. In that period the stock has traded as high as $36.56, on October 15 and as low as $22.34, on August 6.

Volatility aside, analysts have remained mostly positive on the fast-growing, buy now pay later (BNPL) company’s prospects – save for the bearish views from UBS analysts.

With this in mind, and as 2019 draws to a close, we examine the BULL and BEAR cases from two top Australian analysts.

The bull case: a dominant BNPL player

Ultimately, the market opportunity looks simply too large to pass up, thinks world-renowned investment bank Goldman Sachs.

Centrally, Goldman posits that the addressable BNPL market opportunity could be worth as much as $1.0tn – across Afterpay’s key ANZ, UK and US geographies. Citing historical trends in Australia – Afterpay’s ‘stickiness’ means the company may be well positioned to aggressively capture market share and grow its user network in its key markets, particularly the US.

Indeed, as we wrote previously:

‘This [stickiness] forms an important point for a number of reasons, as a strong repeat user base; argues Goldman, has the secondary impact of driving bad debts lower and reducing payment recovery costs.’

Consequently, the investment bank currently has a BUY rating and a lofty price target of $42.90 on Afterpay (ASX: APT)

At current price levels, this would imply upside potential of around 40% for investors.

The bear case: risk, risk and some more risk

Valuation, regulation and competition form the heart of UBS’s bear thesis.

Looking at the valuation side of things, as we previously noted:

‘UBS believes Afterpay would require GMV figures of A$175 billion by the 2030 fiscal year, to justify its share price.’

And though the investment bank does cede that APT is growing quickly – projecting that underlying merchant sales are expected to increase 101% and 56% in FY20 and FY21, respectively – UBS believes the market is too focused on this 'excessive' growth – while downplaying the potential risks Afterpay (ASX: APT) faces.

Besides valuation concerns, competition is a key issue according to UBS. Namley, given the low barriers to entry in the BNPL space and the ease in which well-capitalised players could replicate APT’s product offerings, the investment bank believes this represents a key risk to Afterpay’s dominant market position.

Finally, UBS is also of the opinion that regulatory scrutiny may impact APT’s operations. Citing an ‘Evidence Lab’, UBS found that while Afterpay’s products may not currently fall under the ‘credit’ umbrella from a regulatory standpoint, a significant portion of the Afterpay users the investment bank surveyed as part of this 'Lab' did indeed view APT’s products as ‘credit’.

In step with these points, UBS currently has a SELL recommendation and a price target of $17.60 on the young BNPL company.

Such a bearish price target – if reached – would imply potential downside of around 42% for Afterpay investors.

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