We recently wrote a report looking at two disrupters in the consumer finance/payments space and the rapid growth they were experiencing; Afterpay Touch Group and Zipmoney Limited. Whilst only a month and a half has passed since the report was published, a lot has changed in terms of the business outlook and share-price of our preferred pick, Afterpay.
For those who did not read the first report, here is a quick explanation of the company’s product and business model: Afterpay is currently a single product offering, with its novel idea of charging the business rather than the consumer for access to credit. It offers consumers a ‘buy now, pay later’ layby like payment option which charges no interest, and only small fees in the event of a late payment. Afterpay earns its revenue by charging retailers a fee between 3-6% on transactions, selling them on the fact that Afterpay customers spend more, have larger average basket sizes, are more frequently return customers and the company takes on all credit/fraud risks.
Afterpay Touch released its first full-year results (only for the Afterpay side of the business, given the acquisition occurred on the last business day of the financial year) which showed that operational momentum in the business is continuing unabated. The company said that its customer numbers have grown to over 1 million (from 148,000 12 months ago) and this meteoric growth was also seen in its merchant numbers which were at 7,200 (from 580 12 months ago). Both these numbers and growth rates are even more amazing when one considers the minimal marketing spend that Afterpay has had to spend over the last year (<$1m) to achieve this.

Figure 1: Afterpay Underlying Monthly Sales

Source: Company reports/Clime
 

Figure 2: Afterpay Unique Customers

Source: Company reports/Clime
Other pleasing aspects from the company’s full year results included:

  • Improving ‘net transaction loss’ metrics, which measures the loss after late-fees and any bad-debts recovered, even as the company’s underlying sales grew rapidly (1.6% Prospectus, 0.9% FY16, 0.6% FY17)
  • Improving ‘returning customers’, measured by the percentage of a total month’s sales sourced from a previous Afterpay customer.  Pleasingly, this has continued to trend positively since the company’s IPO (49% June ’15, 66% June ’16, 86% June ’17)
  • Some positive traction with early in-store Afterpay adopters, with Tony Bianco seeing 12% of in store-sales going through the system only weeks after launching, and those customers spending 60% more than other payment options.
  • In-store partnership with Westfield; with both companies working together to push a mass roll-out of the in-store Afterpay offering across retailers in the shopping centres during the September fashion week.
  • Some amazing statistics: Afterpay, as of June 30, was processing 20% off all online apparel and 5% of total e-commerce sales in Australia.

The most recent announcement Afterpay has made has caught the attention of the market more so than its annual results. A few days ago, Afterpay announced a partnership with Jetstar, the discount-carrier subsidiary of Qantas. This is Afterpay’s first foray into the travel space and opens up the $359b market. It is strongly validated as a legitimate player with the largest airline group in the country as its first customer. These continued blue-chip wins by Afterpay are legitamizing the product in the eyes of both customers and retailers and should help its business momentum continue to snowball.

Figure 3: The Afterpay market opportunity

Source: Company reports
In terms of valuing the company, as with other high-growth companies with new market opportunities, it is not a straightforward task. Questions that need to be asked include; how big is the total addressable market? How long can the company sustain its growth rates before it inevitabley slows? Will the product appeal to a broader demographic than millenials? If the company starts to plateau in market share in certain segments, can it continue growth through new verticals (travel, in-store, international)?
In the numbers we are adopting in SIV, we have assumed $1.6b, $2.3b and $3.0b of underlying sales in FY18, FY19 and FY20, respectively. The vast majority of the sales and merchant gains assumed in these numbers is from further e-commerce expansion in the Australian market, moderating (yet still impressive) customer growth and a ticking up of marketshares in its current segments. The potential for the product to have an affinity with customers and merchants in the travel industry and potentially in new international geographies over the coming years makes the trajectory of sales hard to pin-point. If, for example, we adjusted our underlying sales to $2b, $3b and $4b in FY18, FY19 and FY20, FY19 and FY20 values push to $6.80 and $8.80 respectively (although a capital raising would likely be required to get there). The point to be made is that high growth businesses with blue-sky potential can snowball their value extremely quickly if the stars align, although it is rare that a business will not hit the odd bit of turbulence along the way. We are currently holding a position in Afterpay Touch Group within the Smaller Companies Fund, and are looking at the company’s value from the viewpoint of it acheiving various levels of growth and market penetration. Thus we are happy holders at the current market-price.
 
Clime Smaller Companies Fund has a position in Afterpay Touch Group