The Afterpay Ltd (ASX: APT) share price has fallen by around 24% in a month. Has it dropped enough to be good value?
Afterpay’s share price decline
The Afterpay share price has been falling since the middle of February 2021 when market concerns about inflation and interest rates intensified.
A higher interest rate could have a double whammy on a business like Afterpay. High-growth businesses should be discounted more to get back to today’s valuation. There’s also the fact that interest payments are one of Afterpay’s biggest expenses, a higher interest rate would mean a higher expense.
Afterpay is still delivering good underlying growth to increase its market share. The buy now, pay later business reported a strong operating performance in the third quarter of FY21 across all regions with underlying sales up 104% compared to the prior corresponding period. Underlying sales in the US rose by 211% and in the UK it rose by 277% on a local currency basis. Margins continue to be solid as well.
What’s there to be negative about?
Apart from the prospect of higher interest rates, there are a number of factors, as pointed out by US brokerage outfit Bernstein.
Bernstein pointed to other payment processors such as Klarna and Paypal Holdings Inc (NASDAQ: PYPL) that have seen margins decline as they get bigger.
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.
The broker also believes that Afterpay’s margins are going to reduce as time goes on. It expects other large competitors to compete some of them margin away.
Summary thoughts about the Afterpay share price
I don’t see the potential for Afterpay to generate much higher margins than it already has or win huge market share when there’s a lot of large competition out there which could impact both. It could easily drop another 10%. But knowing Afterpay, it could go up 10% as well.
There are other ASX growth shares that are generating good profit growth where there isn’t the same concerns about competition.