Has the Afterpay Ltd (ASX: APT) share price stalled?
Afterpay shares have been one of the most talked-about shares on the S&P/ASX 200 Index (ASX: XJO) in 2020 so far. That's what tends to happen when a company makes a whole lot of investors very poor, followed by very rich, all in a relatively small space of time.
Afterpay shares started 2020 out at $30.63. By February, they were at $40 – a 33% increase in just 2 months. But then the coronavirus-induced March share market crash came and Afterpay shares were quickly wiped out, going as low as $8.01 on 23 March, a level not seen since Afterpay's days of obscurity in 2018.
But today, Afterpay shares are commanding a price tag of $84.84 (at the time of writing) – a 961% return since the lows seen in March. Whilst that might seem like a truly insane return for 7 months, existing Afterpay shareholders might be feeling a bit lost today. That's because since peaking at $95.97 back in August, the Afterpay share price hasn't done a whole lot. Investors are used to seeing this company either crash or explode – not sit comfortably at a certain share price. Yet that is what Afterpay shares are seemingly doing right now and indeed have since August. Just look at the pricing graph below for some context:
So what's going on here? And more importantly, are Afterpay shares a buy today?
Is the Afterpay share price a buy today?
At today's share price, the market is giving Afterpay an approximate market capitalisation of $24.16 billion. That's no small thing, considering supermarket giant Coles Group Ltd (ASX: COL) has, on current pricing, a market cap of $23.66 billion.
Interestingly, Coles recently reported that its FY2020 revenues came in at $37.4 billion, with earnings before interest, taxes, depreciation and amortisation (EBITDA) of $1.39 billion and net profits after tax of $951 million.
In contrast, over the same period, Afterpay reported $519 million in revenue, earnings of $44.4 million and a net loss after tax of $22.9 million. What a contrast!
The difference here is that Afterpay's earnings grew at 73% in FY2020, whereas Coles' earnings grew at 4.7%.
Still, you as an investor have to decide whether it's worth buying Afterpay today for a valuation exceeding Coles. If Afterpay can sustain 74% earnings growth for a decade, it's a bargain today, even at this price. But it would still take around 8 years at a 73% annual growth rate to even match Coles' earnings.
If this growth stalls, whether due to increased competition or some other reason, then a market cap of more than $24 billion starts to look silly. I think it's because of a lack of news surrounding Afterpay in recent weeks as well as it's already arguably-lofty valuation that is keeping the Afterpay share price very neutral at the moment.
Foolish takeaway
At the end of the day, you as an investor have to make this choice. It's a hard one, but, up until now, no one got rich on Afterpay shares by making the easy choice.
