Morgans Senior Technical Analyst Violeta Todorova has rated the Afterpay Ltd (ASX: APT) share price as overbought. Violeta points out that the share has risen by 571% from its March trough to its peak in intraday trading last week. She further points out the technical indicators are in overbought territory. 

Afterpay has pioneered the buy now, pay later (BNPL) sector within Australia. Accordingly its share price has largely been on a bull run since 2019 and the company posted a sales increase of ~100% for FYTD 2020 when compared with the prior corresponding period. Afterpay has become quite ubiquitous in the Aussie retail sector with its branding displayed across a plethora of retailers and ecommerce websites. 

However, the time of large-scale growth in the Afterpay share price is likely over in the analyst’s view, and I couldn’t agree more. 

Why the Afterpay share price stalled early this week

Last week’s explosion of interest in BNPL companies underscored the low barriers to entry within the sector. At the time of writing, the Zip Co Ltd (ASX: Z1P) share price is up 10% from its trading open on Friday. Zip Co also operates in the BNPL sector. However, unlike Afterpay, it offers other services such as lines of credit and the Pocketbook personal budgeting tool.  In addition, Zip Co targets a generation of older millennials, people aged around 35 years and over.

Furthermore, Zip Co has more stringent credit worthiness checks in place than Afterpay. Therefore it is less exposed to credit defaults as the global economy continues down an uncertain path.

Afterpay is starting to establish itself in the United States. Meanwhile, however, Sezzle Inc. (ASX: SZL), another BNPL player, is a native of the US$5 trillion retail economy and is headquartered there. Sezzle has built a network of 1.3 million users and 14.9 thousand merchants.

The company is laser focused on the credit card shunning generations of Gen Z and Millennials; Afterpay’s core demographic. 

The problem with large numbers

The Afterpay share price values the company at $13.9 billion. This makes it larger than Santos Ltd (ASX: STO). If Afterpay doubles its price once more, it would be valued at more than Woodside Petroleum Limited (ASX: WPL). While this could happen, I sincerely and absolutely doubt it. Afterall, in FY19, Afterpay made $236 million in sales revenue. In contrast, for Sezzle to multiply its share price 10 times would value the company at ~$2.5 billion.

Foolish takeaway

Afterpay is no longer alone in a wide blue ocean. With little barriers to entry, the BNPL marketplace is increasingly crowded. Moreover, larger entrants like the 5% Commonwealth Bank of Australia (ASX: CBA) owned Klarna are yet to really start moving.

Lastly, it has a lower creditworthiness threshold exposing it to credit defaults and is pressing into markets where other competitors are already established. If all that isn’t enough, the company is already valued at more than Santos even though its gross sales are 24 times less.

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Daryl Mather owns shares of Sezzle Inc. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has recommended Sezzle Inc. 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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The TPG Telecom Ltd (ASX: TPM) share price grew very strongly between 2011 and 2016 on the back of a series of acquisitions. This included the acquisitions of retail telcos AAPT and iiNet.

This significantly increased TPG’s market scale. It became the second-largest fixed broadband provider after Telstra. However, since then the TPG share price generally failed to gain momentum. This is despite solid gains over the past few months.

Is TPG a good long term buy and hold option for investors?

Let’s first take a closer look at TPG’s business model.

TPG continues to face NBN headwinds

Consumers are migrating from TPG’s legacy of fixed voice and broadband networks to the lower-margin National Broadband Network (NBN). As this continues, this is negatively impacting TPG’s earnings before interest, taxes, depreciation and amortization (EBITDA) and placing downward pressure on the business’s price for shares. In addition, there has been a recent decline in the profitability of its existing NBN customer base.

This trend is reflected in TPG’s financial results for 1H20. Total revenue only grew by a very modest 1% to $1,246.5 million. While underlying EBITDA actually declined by 6% to $399.1 million.

All retail telcos in Australia are in the same boat here. The margins that they receive by purchasing wholesale fixed broadband services from the NBN are wafer-thin and not growing. As their legacy networks shrink further, their overall profitability is also declining.

Higher margin fixed voice still contributes a very significant 29% of gross profit in TPG’s consumer segment. So, profitability will be further impacted as legacy fixed voice is transitioned over to NBN plans over the next few years.

This impact can also be seen from observing TPG’s mix of group broadband subscribers. Only 1,403 of a total of 1,940 broadband subscribers at the end of last year were on NBN plans. As the remainder transition to lower margin NBN products, this will further impact profitability.

In addition, NBN average revenue per user (ARPU) has been steadily declining. It has dropped from $67.4 million in 1H19 to $67.0 million in 2H19 and $66.4 million in 1H20.

Merger with Vodafone places TPG in a stronger position

In March, the ACCC decided not to appeal the Federal Court’s decision to approve the merger of TPG with Vodafone.

I believe that the merger will place TPG-Vodafone in a potentially stronger position to compete with its two main rivals: Telstra Corporation Ltd (ASX: TLS) and Optus. In particular, TPG-Vodafone will be well placed to roll out a competitive 5G offering, driven by Vodafone’s current network.

However, competition will remain tough in the fixed broadband sector. Vodafone currently has a very limited fixed broadband option, so the merger doesn’t provide much initial benefit in that market segment.

Are TPG shares are good long term buy?

I believe TPG’s merger with Vodafone places it in a potentially good position to grow revenues over the next few years.

However, I still have some concerns about declining margins on TPG’s fixed broadband network over the short term. I am therefore not quite convinced it is in the buy zone right now.

This view may change in the months ahead, as we gain more information about the details of the merger.

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Motley Fool contributor Phil Harpur owns shares of Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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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Last week, the ASX continued its upwards trajectory with the All Ordinaries Index (ASX: XAO) rising by 4.3% across the week. The market was buoyed largely by a mini boom in buy now, pay later (BNPL) companies and very large volumes being traded in the Australian real estate investment trusts (A-REITS).

Buy now pay later 

The optimism in the emerging BNPL sector was pretty hard to miss last week. Zip Co Ltd (ASX: Z1P) opened the batting with news of a US acquisition to help it expand further into that market. After surging by 30% on Monday, the Zip share price finished 11.2% up for the week. Zip shares rose by another whopping 15.78% yesterday.

All BNPL challengers experienced double digit share price growth last week, with the smaller companies leaping the highest. Openpay Group Ltd (ASX: OPY) ended the week up by 139% on news of a $30 million placement to fund growth. The BNPL provider dipped slightly yesterday, dropping back by 4.87%.

Real estate

The A-REITS also had a very good week and led the large cap and mid cap market in terms of volumes traded. Vicinity Centres (ASX: VCX) led the charge with a successful $1.2 billion placement at a discount and an announcement to cancel distributions for the 6 months to 30 June. The Vicinity share price ended the week up by 13.7% and gained another 5.74% in yesterday’s trade.

Others also saw share price rises and heavy trading. Scentre Group (ASX: SCG) was the breakaway A-REIT, with a share price gain of 16.7% across the week. Scentre shares continued that upward trajectory yesterday with a gain of 9.52%.

Market surprises

Surging share prices raised up several companies last week. Yet among those, the Kogan.com Ltd (ASX: KGN) share price’s 10.24% gain last week is notable because of what it indicates. The company reported surges in sales in April and May, even as stay at home restrictions were lifted. This underlines the ongoing shift in Australian consumer behaviour to online shopping – a move hastened by the recent lockdown.

The most enjoyable story for me last week was the sudden leap by West Australian robotics company FBR Ltd (ASX: FBR). Formerly Fastbrick Robotics, the company manufactures a robot called Hadrian X – a construction robot that can build the walls of a structure from a 3D CAD model. Investors seemed pleased by the company’s announcement that its robot had achieved a rate of 200 bricks per hour in recent trials. FBR Ltd’s share price finished the week up by 173.9%. 

ASX sliders

The gold sector saw a plunge in share prices last week. As sentiment in equities has increased, gold and other precious metals have seen their prices stabilise in US dollars. However, the rising Australian dollar has exacerbated this for our gold miners. Saracen Mineral Holdings Limited (ASX: SAR) saw its share price fall by 13.3%. Gold Road Resources Ltd (ASX: GOR) also saw double digit share price decay. Its share price was down by 14.6% over the week. Both shares continued to slide in yesterday’s trade, with Saracen down another 6.6% and Gold Road down by 9.35%.

Outside of the gold mining companies on interesting story was Nufarm Limited (ASX: NUF). The agricultural chemical company’s share price fell by 7.5% after the company disclosed impacts to its business by the COVID-19 pandemic. It appears this will have a long term impact that is only now coming to light. Nufarm shares dropped another 3.04% in yesterday’s trade.

More reading

• Kogan announces $115 million capital raising to fund future acquisitions
• Can Kogan.com survive Amazon?
• Why you should be buying the dip in ASX gold stocks
• ASX 200 jumps 2.4%, unloved shares keep rising
• Why Credit Corp and Zip Co shares jumped over 15% higher today

Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of ZIPCOLTD FPO. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia has recommended Scentre Group. 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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