One US broker thinks that the Afterpay Ltd (ASX: APT) share price may only be worth $40 in a year from now.
Why is the US broker bearish about the Afterpay share price?
According to reporting by the Australian Financial Review‘s Johnathan Shapiro, who appeared on Rask’s Australian Investors podcast (see above), US brokerage outfit Bernstein has put a share price target on Afterpay of $40.
That means in 12 months from now, the broker thinks the Afterpay share price could be trading at $40.
The broker believes that customers will see buy now, pay later operators as a commodity product. This could then lead to lower margins, which would hurt potential future profit.
Bernstein pointed to other payment processors such as Klarna and Paypal Holdings Inc (NASDAQ: PYPL) that have seen margins decline as they get bigger. I think you could also say the reverse, perhaps they have gotten so big because the fees were lower and attracted more merchants?
Competition from large players like PayPal and Commonwealth Bank of Australia (ASX: CBA) could be problematic because their offering is cheaper and they already have large customer bases.
How did Bernstein get to a share price target of $40 for Afterpay?
The AFR reported that Bernstein has forecast that Afterpay’s ‘take-rate’ could reduce from 3.8% to 2.8% when it reaches a steady rate. In 2025, Afterpay could deliver $3.6 billion of revenue in 2025, with a profit of $349 million. Afterpay could deliver earnings per share (EPS) of $1.30. On a price/earnings ratio of 40, that would mean a $51 share price in five years. Discounted to today, that would be $40.
The broker doesn’t think that Afterpay can maintain margins significantly higher than its large BNPL peers for the long term.
To justify today’s high Afterpay share price, the ASX BNPL player would need to win a much higher market share than the broker’s forecasts, as well as maintain its high margins.
Summary thoughts
Afterpay certainly has a high level of growth built into its valuation. Growth is slowing, particularly in the more mature ANZ region. The US market isn’t expected to be as profitable due to high interchange fees.
There are other tech shares that are priced very highly, such as Tesla. But some investors can make the argument that profit will be much higher because of the future potential of automated cars turning into taxis for everyone.
I don’t see that type of potential for Afterpay to generate much higher margins or win huge market share when there’s a lot of large competition out there.
There are other ASX growth shares that are already making a net profit with good growth potential.