The Afterpay Ltd (ASX: APT) share price is the gift that keeps on giving; soaring an eye-watering 500% since its March lows and up 46% since its February highs. As it continues to push uncharted territory, is the Afterpay share price becoming too expensive?
Buy now, pay later 'land grab'
Buy now pay later (BNPL) players are in a 'land grab' for international expansion and acquiring more merchants across a broader range of sectors. In Australia alone, there are almost a dozen BNPL offerings, all with slightly differentiated products and backed by some of the biggest financial and non-financial companies. The continued merger and acquisition activity and the broadening of its international footprint will see more money flow into the sector. I believe that as long as money continues to flow into the BNPL space with companies acquired at today's elevated valuations, the Afterpay share price is likely to stay higher.
Afterpay from a valuation perspective
To put it simply, it's very hard to value Afterpay let alone any fintech-related company. In FY19, the company generated $264.1 million in revenue and a net loss after tax of $43.8 million. Even if Afterpay's FY20 revenue were to double (which it probably will), that would still value the company at 30 times revenue!
Afterpay and Zip Co Ltd (ASX: Z1P) currently have a market capitalisation of approximately $15 billion and $2.5 billion respectively. In Q3 FY20 Afterpay generated $2.6 billion in sales with 8.4 million active customers and 48,400 active merchants. In the same time period, Zip generated $1.1 billion in sales with 1.9 million active customers and 22,700 merchants.
Afterpay is 6 times bigger than Zip by market capitalisation. However, Zip's metrics are highly relevant and after its QuadPay acquisition, within an arms reach. By comparison, Afterpay could look a little overvalued compared to Zip.
What will power the Afterpay valuation moving forward is the speed at which it will grow its US market share. The US represents the world's largest retail market, some 15 times larger than Australia. The company is already making significant strides forward, achieving 4.4 million active customers after 2 years in the US market.
The power of private equity
Tencent's substantial shareholding says a lot about where Afterpay is going. The Chinese tech behemoth has a phenomenal track record of investing and profiting from high growth companies across a broad range of sectors. Some familiar names include a 5% stake in Tesla and 7.5% stake in Spotify. Tencent is here to make money, and it could just be the beginning for its Afterpay stake.
Worth buying in at the current Afterpay share price?
It is very challenging to buy Afterpay at today's prices. I would hold my Afterpay shares if I was an existing holder. However, I believe it is too expensive for new investors to buy at the current Afterpay share price.
