The Afterpay Ltd (ASX: APT) share price is going to be on watch today after the buy now, pay later operator suffered a cut of expectations from a broker, Morgan Stanley.
Why is the Afterpay share price on watch?
Firstly, I think it’s important to note that the Afterpay share price is still rated as a buy. However, the key statistic is that the Afterpay share price target has been dropped from $159 to $149. A price target is where the broker thinks the share price will be in 12 months from now. So Morgan Stanley still thinks that the Afterpay share price will rise by 24% over the next year.
A key part of the more cautious outlook by Morgan Stanley, is due to the increased to rising competition in the space which could lead to lower margins for Afterpay over time, according to reporting in the Australian Financial Review.
The big name to announce it’s entering the BNPL space is Commonwealth Bank of Australia (ASX: CBA), which is what Morgan Stanley noted about competition.
From the middle of 2021, CBA will be offering BNPL to its customers. There will be no ongoing fees and no additional costs businesses – standard merchant fees apply.
It can be used anywhere that Mastercard is accepted, up to a limit of $1,000. It can be used for everyday spending transactions of less than $100. There will be four fortnightly instalments for transactions higher than $100.
Late fees of $10 will be charged for each missed instalment repayment. CBA said there are caps so that the total charges are limited.
As a result of CBA’s entry, Morgan Stanley has reduced its expectations of Afterpay’s merchant margins, though the company could reduce the merchant fee pressure with transaction processing costs.
The expected growth rate of the revenue means the broker thinks it’s worth 24 times FY22’s estimated earnings, according to reporting by the AFR. However, the broker did point out that it’s still good value compared to marketplace offerings from big tech.
Summary thoughts
Afterpay does face a lot of competition, not just from its ASX peers like Zip Co Ltd (ASX: Z1P), but also from large northern hemisphere players like Affirm Holdings Inc (NASDAQ: AFRM) and Paypal Holdings Inc (NASDAQ: PYPL).
But, despite the still-positive outlook for the Afterpay share price, it’s not one of the ASX growth shares that I’m looking for with my portfolio because of that rising competition and potential margin pressure down the line.
