When Frank McNamara ran out of cash at a trendy NYC restaurant in 1949 he was so embarrassed about not having money he created the Diners Club card.

Before too long AMEX and MasterCard were born — and began feeding consumer appetite for pay later services… with the obvious hook of uber-high interest!

***

If you have recently been shopping at Myer, Rebel or just about anywhere in a Westfield shopping centre or online, chances are, you would have seen an Afterpay logo slapped on a storefront.

Afterpay allows shoppers to ‘buy’ a product, receive it now and pay for it in four equal instalments. The app was designed to feed into consumer psychology and our insatiable need to fulfil our desire for a product immediately. For the store owners, it means customers spend more.

Afterpay makes a dime by clipping the ticket on the price charged to consumers by the retailer. In its 2018 half-year, it made about 2.3% of the sales price after adjusting for losses for bad debts and the costs of the transaction.

Afterpay Touch Group Ltd (ASX: APT) is the corporate name behind the service and is listed on the Australian share market. Here’s how its shares have fared over the past 13 months:

Data sourced from Google Finance on 20/07/2018. Past performance is not a guarantee of future returns.

Some investors are claiming Afterpay is the greatest technology company in Australia given how fast its shares have risen and its wide-spread adoption.

Thorney Technologies, an investment fund run by billionaire Alex Waislitz said, “To me, this appears just the beginning for APT with further growth opportunities identified in several new verticals and service industries both domestically and overseas.”

Thorney is a big investor in Afterpay.

In an ASX filing this week, Afterpay said its platform processed $2.18 billion of online and in-store sales in its 2018 financial year and it would earn an operating profit between $33 million and $34 million.

Sounds too good to be true.

Invest Now, Pay Later?

Investors are thrilled with Afterpay’s success — naturally, it’s up 253% since July 2017. Consumer groups, however, aren’t nearly as impressed.

They have grown increasingly concerned about buy now, pay later services because they side-step important credit licensing laws, which are designed to protect consumers.

Given the consumer advocates’ backlash, Afterpay and other buy now, pay later providers were being reviewed by ASIC, the finance watchdog.

“We plan to collect data from buy now, pay later providers in the first quarter of 2018 to determine the size and demographics of the industry and participants, as well as to identify any consumer harms,” ASIC’s Michael Saadat was reported as saying in Fairfax late last year.

Importantly, that was before a minor used Afterpay to buy alcohol online by creating a fake account using the Spanish name for Micky Mouse and a prepaid debit card.

Following a blast from the media, which resulted in the company’s share price falling steeply in April, Afterpay says it has implemented more rigorous ID checks and is working with both regulators and consumer groups.

So far, it seems, Afterpay has played their hand well.

My Take

It’s obvious that Afterpay’s addressable market is large, both here in Australia and abroad. In the US Afterpay said it processed $11 million of sales in June.

But in investing we don’t make money from what the market already knows. We make money from what we know that other investors do not. So it must be asked, are Afterpay shares already priced for ultimate success and will we get a better opportunity to buy shares in the future?

At the current share price of over $15 Afterpay is worth around $3.3 billion. In my opinion, that’s a generous valuation for a business that may be susceptible to competition from rivals and other stakeholders.

We also have to consider the demand for credit as a form of payment comes and goes, and the net transaction loss that Afterpay incurs on its sales would most likely increase if the economy hits a rough patch — which it will eventually.

In my opinion, another risk is Afterpay being caught out providing credit services. It is an important risk to consider and factor into the valuation.

So what am I doing?

Given my focus on valuation and assessment of its moat, I’m not buying Afterpay shares today. I’m happy to watch this one from the sidelines, for now.

Cheers to our financial futures!

Owen Raszkiewicz
Founder, Lead Adviser of Rask Invest
The Rask Group

Subscribe to my latest blog updates here.

At the time of publishing this article, Owen does not hold a financial interest in Afterpay Touch Group or any company mentioned here.

Disclaimer: This article contains general financial advice only and should not be considered as personal financial advice. It does not take in account your need or objectives. Therefore it should not be relied upon. Please consult a licensed and trusted financial adviser before acting on this information. Past performance can be a very poor indicator of future performance.

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