Afterpay reported extremely strong growth across all its key metrics for the 12 months ending 30 June 2020. Underlying merchant sales rose 112% to $11.1 billion. Active customers increased 116% to 9.9 million. Active merchant numbers were 72% higher at 55,400 and EBITDA was up 73% to $44.4 million.

On top of this, the level of impairments (bad debts) was proportionally lower than the previous year, and the company has available liquidity and growth capacity of $2 billion.

The year also highlighted the move away from being primarily an Australian company, with international markets (US and UK) now contributing 41% of revenue, up from 18% last year.

The company provided an interesting chart that showed the acceleration in online sales in the US during the pandemic, and although some of the gains are likely to be given up, the growth that occurred in the space of eight weeks was equivalent to what had taken place in the previous ten years, providing a big tailwind for sales.

After launching in the US only two years ago, Afterpay has now signed up over 5 million Americans, and sales were up 330% on last year. One big question about APT was whether as a later entrant to the US market, it could generate high levels of growth in a more competitive environment? So far the answer seems to be that it can.

In Australia, Afterpay now generates 98% of sales from existing customers, and in the US that metric has increased to 86%. Compared to their competitors, APT seems to be better at retaining customers on their platform.

The highlight of the Australian performance was the continued growth in repeat users. Active customer growth is maturing, up only 18% on last year. But once people are on the platform, they are using it more. This resulted in underling sales increasing 52% for the year.

This is exactly the path that Afterpay will hope to replicate in other markets. Get user numbers up, get more merchants on board, and increase the frequency of use whilst containing loss rates.

Top line growth numbers get a lot of attention, but one of the more significant metrics from the result was the credit performance.

Afterpay wears the credit risk on consumers’ purchases and increases in loss ratios can wipe out large amounts of capital. The company has attracted new, young customers with limited credit histories, and whilst they do a risk assessment, the ultimate loss performance has been a bit of an unknown.

The net loss as a proportion of sales was steady for the year at 0.4%. This was better than company guidance.

The company did not provide formal guidance for 2021 but gave some high level commentary. The year has started strongly, continuing the momentum of the fourth quarter. It was noted that Australia had accelerated in the first two months of the year, and underlying sales in the US were stable after a remarkable stretch of growth during the lockdowns.

Afterpay announced a launch into Canada earlier in August, and will start scoping out selected Asian markets during the year. Last week the company announced the acquisition of a small BNPL provider Pagantis for €50 million. This takes APT from its base in the UK into Western Europe, where Pagantis has operations across France, Spain and Italy.

Afterpay seemed to make more of a point this year about the benefit of their services to consumers versus credit cards and other BNPL providers, perhaps due to the increasing regulatory scrutiny they are receiving.

Near term metrics don’t make much sense for Afterpay given the lack of earnings. Looking forward two years to 2022, the market is forecasting revenue to almost triple. At that point consensus forecasts have APT on a PE ratio of 274, an EV/EBITDA of 128 and an EV/Sales of 19.

It goes without saying that these metrics are all extremely high, and there is still quite a long path ahead to even hit these numbers.

The trends are currently positive in all time frames.

The momentum in both APT’s share price and the underlying business is extremely strong. However, here at a share price of $91.26 the extreme valuation of the stock is also without precedent in Australia. The share price has traded over a very wide range in the last six months, from as low as $8 to an intra-day high of $95.97 yesterday.

The trend is currently positive but given the lack of any sort of valuation anchor for the stock, an investment in Afterpay at current levels should be considered high risk.

Disclosure: The author does NOT hold shares in APT.

Neither The Super Investor nor the author has received [or will receive] any benefit whatsoever from any party at all for the publication of this article.

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