The Afterpay Ltd (ASX: APT) share price. It’s right up there with the coronavirus pandemic on what is dividing investors in 2020.
There’s no doubt Afterpay’s growth trajectory has been impressive. Steady operational expansion and consistently low bad debts have been hallmarks of Afterpay’s growth.
The Afterpay share price has enjoyed similarly strong growth this year. In fact, shares in the buy now, pay later leader are up 128.5% in 2020.
But, ahead of the company’s August earnings result, is Afterpay set to be an ASX boom or bust?
Why investors are split on the Afterpay share price
One article in the Australian Financial Review (AFR) looked at exactly this issue.
According to the article, a Morgan Stanley report on US payments company had Afterpay at 23rd by market share of the 477 merchants in the US.
What that means for the Afterpay share price really depends on your perspective. On the one hand, Afterpay could have a lot more market to capture in the coming years.
On the other, Afterpay is in a crowded market and may not have the growth that its share price is pricing in.
I think the key for further capital gains is strong customer acquisition and retention.
One potential area of concern is slowing growth in Afterapy’s home market. Australia and New Zealand merchant numbers have slowed in recent months despite strong growth in the United States and the United Kingdom.
The other big factor is keeping bad debt expenses low. One potential area of concern for buy now, pay later is a rising bad debts expense.
That hasn’t been the case so far, with Afterpay’s bad debts remaining low. Investors have been bullish about the company’s growth trajectory and that’s reflected in the Afterpay share price this year.
Foolish takeaway
I don’t like to invest in companies that I don’t understand. The underlying business is simple and has proven to be effective.
However, I don’t understand the Afterpay share price valuation right now. The company has a lot of further growth required to make its current valuation a reasonable buy.
If the current growth trajectory continues, we could see Afterpay hit $100 per share in 2020. But just one slight stumble could see the company’s value plummet this year.
ASX tech shares have rocketed but I don’t want to be caught chasing gains that I don’t understand. That means I’ll be steering clear until I can make sense of the fundamental value being priced in.
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More reading
- How these ASX investors made 60% in three months
- Is the Afterpay share price a buy?
- Here’s how to start investing with $5k
- US tech shares deliver massive results – what does it mean for ASX tech shares?
- Will the coronavirus kill cash?
Motley Fool contributor Ken Hall 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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