Afterpay Ltd (APT) is a company listed on the ASX, boasting a market capitalisation of over $25 billion and operating in the Buy Now Pay Later (BNPL) sector. Many investors will no doubt have heard of this stock which has seen its share price sky-rocket from its 52-Week low of $8.01 to a 52-Week high of $95.97 after it was announced that Tencent Holdings, a Chinese firm with the massively popular platform WeChat, would take a $400 million stake (5%) in the business.

Afterpay pursues aggressive global expansion.

 

Another contributing factor to this near 1100% increase in the share price can be attributed to their aggressive expansion into international markets including the US, Great Britain and more recently Europe as well as a large take up by major brands. This increasingly popular form of credit is suggested to be rivalling that of credit cards largely due to its accessibility to consumers.

On Thursday last week (27th August), Afterpay released their annual report for the financial year end June 2020. This report has yet again impressed investors with strong revenue growth and underlying sales for the year growing from $5.2 billion in 2019 to $11.1 billion in 2020, representing a 112% increase. On top of this, Afterpay now has close to 10 million active customers, an increase of 116% from last financial year.

afterpay growth

Is revenue growth equaling profit?

 

While this strong revenue growth is enough to gain the attention of any investor, the question must therefore be asked whether this is translating to profit.

A closer inspection of their annual report suggests that despite this incredibly strong revenue growth, Afterpay surprisingly recorded a $22,857,000 loss for the year. Interestingly, operating cashflow is also down a whopping $233,953,000. It can be seen in the figure below that the receipts they generate from their customer base is simply not enough to cover their payments out to merchants. Additionally, payments to employees and taxes provide a further cash drain in this area. This represents a considerable drop from the previous period and should perhaps act as a warning sign to investors.

 

afterpay growth
(Afterpay Annual Report, 2020)
In spite of this large decline in operating cash flow, Afterpay are cashflow positive for the year which can be attributed to a strong reliance on capital raisings and borrowing in order to maintain their business model. This may therefore suggest that greater expansion into international markets and continual revenue growth could perhaps lead to greater declines in net profits if Afterpay can not find a way to increase their bottom line.It therefore comes at no surprise that UBS have released a report stating they that they believe Afterpay is significantly overvalued with a price target of $27, maintaining a ‘sell’ rating on the stock.

Nevertheless, the market for now clearly disagrees with this sentiment suggesting they believe Afterpay can turn things around through their leverage as ‘first mover’ in these new markets. With the prospect of future success being ultimately priced in, only time will tell if this is indeed the case.

New to investing? Learn about How to keep your investment decisions simple.

 

Disclaimer:
This article does not take into account the investment objectives, financial situation or needs of a particular person or entity. Before acting on any investment strategy or advice you should first consult with your current ASIC accredited investment professional or seek out a compliant investment professional for such.