Is the Afterpay (ASX:APT) share price cheap? Here’s what 1 broker thinks

Afterpay Ltd (ASX: APT) shares have been struggling recently in the wake of broader market volatility, the underperformance of tech shares and sharp selloffs in the buy now, pay later (BNPL) sector.

Today, the Afterpay share price has managed to work its way up to a 7.25% gain. But at its current level of $92.74 on Thursday, it’s still a long way off from its February highs of around $160.

With the company promising continued international expansion and hoping for explosive levels of growth, could the Afterpay share price be a bargain at current price levels? Here’s what Macquarie had to say on Thursday.

Macquarie upgrades Afterpay shares from neutral to outperform

Macquarie has come out with a bold upgrade for the Afterpay share price, retaining a $120 target price and outperform rating.

What’s surprising is that Macquarie’s upgrade comes not that long after its grim near-term commentary for the BNPL industry on 24 March. This was when the broker acknowledged the explosive growth of the sector but said that an “excessive number of participants has entered the industry in the near term resulting in industry overcapacity”.

The broker also said it expects this period to be followed by “a few years of industry consolidation (i.e., pain for all players) before industry normalisation at a healthier supply/demand equilibrium”.

In terms of a timeline, Macquarie’s research report said “the period of pain typically lasts for 1-2 years, followed by a year or so of recovery before share prices return to levels prior to oversupply”. By the industry normalisation stage, the broker believes that “not only does the industry come out more robust but typically the strong emerge stronger whilst the weak, weaker”.

In today’s broker note, Macquarie observed that there is limited brand loyalty among BNPL players in the United States. The broker’s survey reveals that an estimated 70% of users would prefer to sign up with a different BNPL provider rather than switch stores.

Macquarie does believe, however, that Afterpay could have an edge in the all-important US market given its large two-sided network of merchants and users. The broker’s findings rank Afterpay as the highest among its peers in the context of merchant/user networks.

The broker also shed light on brand perception in the US, ranking PayPal, Affirm and Afterpay in the top three, in that order, among the brands surveyed.

Foolish takeaway

Shareholders will no doubt be encouraged to see a previously cautious broker update its rating of Afterpay shares from neutral to outperform.

However, the recent drivers of the Afterpay share price have largely been outside of the company’s control. Factors such as the S&P/ASX 200 Info Tech Index (ASX: XIJ) falling 15% year to date, the Affirm share price sitting around record lows and smaller ASX-listed BNPL shares such as Laybuy Group Holdings Ltd (ASX: LBY) and Openpay Group Ltd (ASX: OPY) sliding more than 50% in the last 12 months are likely to have dragged on the Afterpay share price.

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