What a ride it has been for Afterpay Ltd (ASX: APT) shareholders in 2020, with the Afterpay share price plummeting to lows of $8.01 in March, then rebounding to $70.18 per share at yesterday’s close. That’s an increase of almost 900% – an extremely hefty gain.
The buy now, pay later (BNPL) industry has exploded in recent memory, with fellow rivals Zip Co Ltd (ASX: Z1P) and Openpay Group Ltd (ASX: OPY) all sitting on large gains for the year.
However, the real question on everyone’s mind is can the Afterpay share price go higher?
Is Afterpay’s pathway to profitability near?
The company released its latest result to the market in June, reporting massive increases in FY20, with underlying sales up 112% to $11.1 billion and active customers jumping 116% to 9.9 million.
With the Afterpay strategy focused on global expansion to new markets like Canada, profitability for the company still looks some time off. Expenditure on marketing in the US and UK has deepened its losses momentarily, as it seeks to capture the addressable online opportunity valued at $30 billion.
In addition, capital raising has been used to help fund its accelerated growth, with Afterpay looking to achieve underlying sales of $20 billion by mid-next year. Assuming that target is reached and costs can be contained, net sales will be around $400 million, thus leaving about $180 million net profit.
Of course, anything could change given the current climate. However, it’s hard to argue that the company has not been gaining enough traction to one day rival Visa Inc. (NYSE: V).
Is the BNPL industry in a bubble?
Since March this year, there has been a lot of FOMO activity surrounding the Afterpay share price and its peers. Almost all of the leading BNPL providers have seen their valuations skyrocket to astronomical amounts, which eventually must be justified to the market. There’s no doubt that Afterpay is a growth engine, but how much of its rapid performance does it have left in the tank? Only time will tell.
History has shown investors can get caught up in the hype and put their life savings on promising stocks. You only have to look as far as the DotCom bubble in the late 1990s, and more recently the Bitcoin bubble to see an investor’s hard-earned cash being burned away.
Still, the question remains whether we are currently in a BNPL tech bubble – and I believe we are.
The idea of a young demographic market adopting the ‘new cool way to pay for products’ coupled with Afterpay’s ambitious targets are large factors driving the company’s lofty valuations. However, young people tend to move onto new things quickly and in my opinion, there will be a limit to Afterpay’s future success. New forms of digital payment have accelerated the past few years, and it’s only a matter of time before consumer behaviour embraces something else that’s new and exciting.
Foolish takeaway
While Afterpay is expected to report its full year results on 27 August 2020, I think that the share price is too risky to buy at this stage. Spending habits could change once Jobkeeper and Jobseeker payments subside. With high unemployment levels and an uncertain future for many businesses, one slight stumble could see investors flee the BNPL company.
I will be steering clear for now, until I can see a meaningful drop in the Afterpay share price.
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Aaron Teboneras has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Visa. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. 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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