Afterpay share price tumbles on broker downgrade

The Afterpay Ltd (ASX:APT) share price is tumbling lower after being downgraded by a leading broker on Wednesday…

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The Afterpay Ltd (ASX: APT) share price was an impressive performer on Tuesday.

The payments company's shares rocketed 30% higher following the release of its latest business update.

What was in the business update?

In case you missed it, Afterpay impressed the market with an update that showed little impact from the coronavirus pandemic.

During the third quarter of FY 2020, Afterpay delivered underlying sales of $2.6 billion, up 97% on the prior corresponding period. This was driven by a 40% lift in ANZ sales, a 263% increase in US sales, and a $0.1 billion contribution by the fledgling UK business.

The strong third quarter lifted the company's underlying sales to $7.3 billion year to date. This is a 105% increase on the prior corresponding period.

This was driven by another strong increase in customer numbers. At the end of the period the company had 8.4 million active customers on its platform. This was up 122% over the 12 months and comprised 3.2 million ANZ customers, 4.4 million US customers, and 0.8 million UK customers.

Finally, Afterpay revealed that its Net Transaction Margin was stable at 2% and its gross losses remained in line with the first half at 1%.

Is it too late to invest?

Whilst I don't believe it is too late to invest with a long-term view, there might be limited upside in the immediate term.

This is the view of analysts at Goldman Sachs who have downgraded its shares to a neutral rating with a $25.75 price target.

This appears to have put pressure on Afterpay's shares on Wednesday, leading to their 4% decline.

Why did Goldman Sachs downgrade its shares?

The broker was impressed with its update and made the move on valuation grounds following a strong share price rise.

Goldman explained: "In our view, APT's business update was as solid as could be expected in the current uncertain macro environment."

Adding: "Since adding APT to our Buy list on 28 March 2020, shares are up +49% vs. the ASX 200 +13%."

The broker also commented on Afterpay's risk controls. These have seen the company reduce transaction values for certain users and move the ANZ business to a 25% upfront payment model. The latter is in line with the US and UK.

"These refinements to risk parameters will have some negative consequences for near-term GMV growth, but we believe the company's focus on risk management at the expense of growth is categorically the appropriate focus the business should have given the current uncertain macro background," Goldman said.

The broker concluded: "APT has consistently shown it can grow customers and merchant sales. Managing risk is where the model is currently untested and if it can manage a downturn the rate and depth of the one we are expecting in the June and September quarters, it would prove the robustness of its business model which has historically been the most common question we have received since initiating coverage on the company."

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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.

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