The Afterpay Ltd (ASX: APT) share price has come under pressure on Friday and is one of the worst performers on the ASX 200.
The payments company's shares were down as much as 12% to $32.08 at one stage. They have since recovered slightly, but are still down 8.5% to $33.34 at the time of writing.
Why is the Afterpay share price sinking lower?
There have been a couple of catalysts for today's share price weakness.
The first is of course the broad market selloff following concerns over the spread of the coronavirus in Europe and the United States. Tech shares have been hit particularly hard after a heavy decline by the technology-focused Nasdaq index overnight.
Another driver of today's decline appears to be a broker note out of Goldman Sachs.
According to the note, the broker has taken Afterpay off its conviction buy list and downgraded it to neutral with a reduced price target of $37.70.
Why did Goldman Sachs downgrade Afterpay's shares?
Although Afterpay's half year result revealed better than expected top line metrics such as merchant sales, customer numbers, and NTP margin, the broker was disappointed with its bottom line.
This was driven by significantly higher than expected operating costs to scale in the United States, UK, and Canada in the near future.
These increasing costs have led to Goldman Sachs downgrading its earnings estimates and ultimately its valuation.
The broker explained: "Whilst the topline metrics exceeded our expectations, the cost investment the business is currently making is offsetting this topline benefit, with 1H20 operating costs significantly exceeding our expectations."
"Substantial investment is being made to scale the business into a world-class global platform: APT has made a number of recent senior management hires which contributed to a 72% increase in 1H20 for employee expense cost growth, and APT is investing heavily in marketing (A$32mn in 1H20, +378% on pcp) to optimise outcomes for retailers at launch while also accelerating its customer acquisition funnel," it added.
This has led to the broker revising its underlying net profit after tax forecasts in FY 2020, FY 2021, and FY 2022 from $5 million, $82.6 million, and $194.9 million to -$30.5 million, -$2.3 million, and +$168.5 million.
