Is the Afterpay share price worth $168?

The Afterpay share price trades at a premium to its BNPL peers, is this valuation gap justified?

BNPL continues to gain traction, but are valuations stretched?

Afterpay (APT) opened Friday’s session at $150.00 per share, a shade off the stock’s all-time high. At that price, the company trades above 70x sales – making it one of the most expensive technology companies in the world.

Some analysts however, believe that Afterpay is potentially worth even more than that, with one broker raising their price target on the stock to above the $160 mark, this week.

This meteoric run, which has seen APT gain ~280% in the last year, to a degree has been grounded in the company’s stellar operational performance – though it should be noted that there are many bullish assumptions tacked onto the narrative propelling the stock higher.

While BNPL competitors such as Zip and Sezzle have both reported their latest operational performance figures, Afterpay has not, leaving traders and investors free to tease out assumptions of the company’s performance during the first half of FY21.

Afterpay is set to report its first-half, 2021 results on February 25.

Looking at Afterpay’s most recent quarterly update – released in October – the company clocked up another period of impressive growth.

On the top-line, the company reported that underlying sales more than doubled, coming in at $4.1 billion, representing a year-over-year increase of 115%.

Elsewhere, APT said that merchant revenue margins 'remained firm', gross losses continued to trend lower and robust Net Transaction Margins were maintained.

By the close of Q1 APT had 11.2 million active customers, 6.5 million of which were based in the US; while active merchants came in at 63.8 thousand, up 70% year-over-year.

One trend that investors will likely be keen to see more data on as part of the upcoming H1 is repeat customer usage statistics. During the first half of 2021 APT noted that Australian customers, on average, transacted with APT 52 times per year, 'across 26 different merchants' and 'within 11 different verticals.'

The company at the time said that international markets were exhibiting similar trends.

Afterpay share price: What’s the stock really worth?

Since the release of the company’s Q1, the APT share price has been bid some 50% higher, far outperforming the ASX 200 benchmark. The valuation gap between Afterpay and its peers has also grown significantly: Sezzle trades at 47x sales while Zip trades at just 20x sales.

Despite the whole sector trading on an eye watering set of multiples – some, such as Bell Potter – believe the stock still has further upside potential.

In a note on the company, analysts from Bell Potter raised their 12-month price target on APT from $140.00 to $168.50 per share while reiterating their Buy rating.

Looking at what drove the price target increase, while the broker said that its earnings estimates for the company remain unchanged, analysts rolled their 'valuation forward, primarily impacting our average customer number’.

As per Bell’s FY21 estimates, the broker expects APT to record full-year revenues of $944.3 million, earnings (EBITDA) of $97.4 million, and reported profits (NPAT) of $15.9 million.

APT's upcoming H1, its European BNPL product launch, the Westpac-Afterpay partnership and upcoming Asian Expansion plans were all touted as possible bullish catalysts for the stock.

Westpac-Afterpay collaboration agreement revisited

The other thing analysts from Bell Potter dove into was Afterpay’s recently announced collaboration agreement with Westpac Banking Corporation (WBC).

Under that agreement, Afterpay is set to make use of the bank’s digital bank-as-a-service (BAAS) platform, in a move that will allow the company to offer savings accounts and cash flow management tools to its domestic user base.

At the time of the announcement, Afterpay’s management, in explaining the rationale behind this agreement, said:

‘Linking the new service to a user's existing Afterpay account will deliver further insight into how customers prefer to manage their finances, what their savings goals are, and how responsible spending behaviour can be further encouraged and rewarded.’

Moreover, at the time, Afterpay’s co-CEO Anthony Eisen championed Westpac’s foray into the BAAS space, saying:

‘We applaud Westpac's foresight in curating this innovative digital platform and welcome their desire to partner with Afterpay to meet the changing needs of a powerful next generation of customers.’

Bell Potter believes that Afterpay may eventually use WBC’s banking platform to develop other innovative and consumer friendly financial products, including home loans and even investment products, such as index fund investing.

Commenting on the possibility of APT one day offering its customers home loans, Bell Potter said:

‘If mortgages were to become part of the mix, over time, then there is established revenue share models which exists with mortgage broker that Afterpay may be able to enjoy, without taking any balance sheet risk for the mortgages.’

The exact mechanics of how this revenue model would work, or drive material benefits for APT, remain uncertain.

Should Afterpay be successful in its foray into other financial product offerings however, the broker further opined that at scale, the company could become a conduit for ‘banking products in Australia, then it is likely APT will follow with a similar offering across all jurisdictions, which would transform perception, and the opportunity for the stock.’

The broker described a potential foray into credit cards as unlikely, while categorising personal loans as a maybe, a view that seems aligned with Afterpay’s core value proposition.

APT was up by nearly 3% by Friday's afternoon session, with the stock trading just above the $150 mark by 3:10pm.

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