Is AfterPay the best growth share on the ASX?

Will AfterPay (ASX:APT) knock it out the park in the US?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The AfterPay Touch Group Ltd (ASX: APT) share price is up 7% to $20.94 this morning despite the buy-now-pay-later start-up star releasing no specific news to the market.

AfterPay is a stock I suggested as being among 10 shares I'd buy for 2019  on January 4 2019, but back then the stock sold for $11.97, whereas today it changes hands for nearly double that to mean investors need to ask themselves whether the risk / reward is still justifiable in buying the stock.

An obvious point to note is that the stock is volatile. This is because investors struggle to value it given the blistering growth, but unpredictable future as it enters two large and complex markets in the U.S. and U.K. While its core Australian business may start to mature after some wild success.

The sentiment-driven volatility then may offer investors a cheaper entry point between now and its next market update and I'll look to add to a small position I own if prices get much cheaper.

Regardless of the volatility, potential investors should focus on the valuation with AfterPay's 236.8 million shares on issue translating to a market cap around $4.91 billion on today's $20.75 share price.

For the six months ending December 31 2019 net income (merchant fees and late fees) on a pro-forma basis climbed 91% to $116.1 million, but the group swung to a $22 million loss on the back of rising costs around growing its US business.

In particular share-based payments to staff ballooned over the year which is no surprise given this is a common feature of fast-growing tech businesses in the U.S. where AfterPay is investing heavily in the staffing required to grow.

The problem for investors is that as a start-up type business with little precedent or global peers AfterPay is tough to value as the future is so uncertain.

In particular its blockbuster rate of initial growth in the U.S. means investors are looking at a wide range of possible outcomes for the business, before we even factor in the potential UK success.

Doing some back of the envelope calculations we can see then that if AfterPay were to grow income 25% in the second half of fiscal 2019 over the first half total income for the year would come in around $260 million.

This would place the stock on 18x a forward estimate of sales, with further investments in the U.S. and U.K likely to prevent it from breaking even in the next 12 months at least.

To me then it looks like AfterPay would have to nearly double its income again in fiscal 2020 to make today's share price look "cheap" on around 9x-10x 2020's sales.

For the six month ending December 31 2019 the U.S business only contributed 13% of underlying merchant sales, so we can see the market is already pricing in more success for the group in the US, which looks reasonable given its strong start in the region.

However, this also suggests its Australian business will also have to keep posting some strong growth if it's to justify today's valuation.

There is the potential for the Australian business to slow down as consumers could potentially spend less, while AfterPay might find it harder to add retail clients at such strong rates in Australia as the market matures. The UK market also remains a known unknown, with a wide variety of possible outcomes.

Should you buy?

If it can double sales income in fiscal 2020 the stock is probably cheap, but hitting this outcome will depend on very strong growth in the U.S. continuing.

As such I wouldn't rush into the stock at today's valuation and find some of the bullish broker calls from the likes of Bell Potter ($28 share price target) a little outlandish.

I'd rate the stock a buy, but only at a valuation significantly lower than today's given the unpredictable future and amount of growth priced in already at $20.75.

I picked up shares at $13.05 only a few months ago, and personally wouldn't pay more than 20% over that at around $15.65 as an investor today.

It's also worth remembering it could eventually face stronger competition in Australia from the likes of Flexigroup Limited (ASX: FXL) or Zip Co Ltd (ASX: Z1P), who try to take market share by simply offering to charge merchants lower fees on every sale.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 30 April 2025

Motley Fool contributor Tom Richardson owns shares of AFTERPAY T FPO. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended FlexiGroup Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Gainers

The silhouettes of ten people holding hands with their arms raised against the sky, as the sun rises or sets in the background.
Share Gainers

Here are the top 10 ASX 200 shares today

ASX shares finished the trading week on a high this Friday.

Read more »

A businessman stacks building blocks.
Technology Shares

6% gain! What's up with Block shares today?

Block shares are up more than 34% since 2 May.

Read more »

A young man punches the air in delight as he reacts to great news on his mobile phone.
Share Gainers

Why ARB, Block, Mayne Pharma, and Paladin Energy shares are charging higher today

These shares are having a strong finish to the week. But why?

Read more »

A woman puts her hands up as she smashes and breaks through a glass ceiling.
Share Gainers

How these 5 ASX 200 stocks are smashing the benchmark this week

These fives ASX 200 stocks have made some very happy shareholders this week. Here’s how.

Read more »

A man looking at his laptop and thinking.
Share Gainers

Here are the top 10 ASX 200 shares today

The markets lost their steam this Thursday.

Read more »

Ecstatic woman looking at her phone outside with her fist pumped.
Share Gainers

Why Catapult, Hutchinson, SKS, and West African shares are pushing higher today

These shares are having a strong session despite the market weakness.

Read more »

Rising gold share price represented by a green arrow on piles of gold block.
Gold

Up 72% in 2025, why is this ASX 200 gold stock racing ahead of the benchmark again today?

Investors are bidding up this high-flying ASX 200 gold stock again on Thursday. But why?

Read more »

Businessman smiles with arms outstretched after receiving good news.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a wonderful Wednesday session for investors today.

Read more »