Afterpay Ltd. (AFTPF) has a solid business model and it is a good investment opportunity, according to a bullish thesis by Hayden Capital. Afterpay is one of the world’s leading buy-now-pay-later (BNPL) payment providers. It offers consumers a way to pay for items with only an initial 25% down and 0% interest, while payments are then made in 2-week intervals across four equal installments. The Melbourne, Australia-based company is primarily focused on the fashion and beauty category.
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Afterpay generates revenue in three different ways. Through their main Buy Now Pay Later product where consumers receive the service for free and pay off their purchases over a 6-week period and then can make payments in 2-week intervals across four equal installments. Merchants integrate Afterpay into their item description and checkout pages, and pay 3 – 6% of merchandise value. Secondly, through late fees which are used to encourage customers to pay their outstanding balances on time. The terms differ by country, however generally the late fee is $7 – 10 for a missed payment. Third revenue source is Pay Now service which is the legacy Touchcorp business. Touch provides services to other businesses, such as fraud protection, compliance, data collection, customer identification, transaction integrity, and card payment solutions. Touch derives transaction fees for these services, in the form of either a fixed fee or percentage of transaction volume.
Afterpay Ltd. (AFTPF) has a highly profitable business in Australia, according to the thesis. The company currently has 3.4 million customers in Australia and New Zealand (ANZ). The company is now focusing on the U.S. market and want to replicate its Australia success model in the world’s second biggest ecommerce market. The company is reinvesting all of its profits from the ANZ business into the U.S. market where it launched in 2018.
As such, our thesis (and source of future returns) comes from determining whether the company can replicate a similar level of success in the US, as they have in Australia.
With the U.S. having 10x the population and similarly 11x the ecommerce market size (~$400BN), there is still ample appreciation potential if we are correct.
Afterpay is believed to be finding a good amount of success in the U.S. The company launched in the U.S. in 2018 and gained more customers than their mature ANZ market – 6.5 million U.S. customers vs. 3.4 million in ANZ as of FY Q1 2021 – during a short timeframe, according to the thesis.
Hayden Capital is optimistic about Afterpay’s success in the U.S. market where it says customers are increasing their purchase frequency and more merchants are adding the Afterpay option to their payment options.
We expect Afterpay to generate ~AUD $22 Billion in GMV (FY 2021E), realizing ~AUD $1 Billion in revenues and a ~4.6% take-rate (we expect take-rates to decline slightly in the short-term, as the US business grows quicker than the more mature Australian business).
Over the next three years, Hayden Capital expects the company to decelerate, but still grow at an impressive ~50 – 100% per year.
This is largely driven by the US market (which grew +330% in FY 2020). New merchant adoption is still strong, in-store roll-out just began a few months ago, and purchase frequency will increase as the number of merchant partners & brand awareness grows (similar to what Australia experienced a few years ago).
Afterpay Ltd. (AFTPF) has been showing strong performance on the stock market. The share price has jumped more than 230% so far this year. The stock has seen more than 216% growth over the past 12 months, while it the stock price surged 31.82% over the past three months.
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