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Why Afterpay (ASX:APT) shares could continue to soar

After yesterday’s trading session, Afterpay Ltd (ASX: APT) announced a further growth opportunity in the US. Here are the details.

After yesterday’s trading session, buy-now-pay-later (BNPL) giant Afterpay Ltd (ASX: APT) announced a further growth opportunity in the US.

Afterpay’s shares have been a strong performer recently, up a huge 33% over the past month. The broader tech sector has also improved recently as the US markets have led the charge.

APT share price

Source: Rask Media APT 1-year share price chart

Afterpay expands service

Yesterday’s announcement revealed that Afterpay’s service will become available to a select group of customers from popular merchants based in the US. Some of these include Amazon, CVS, Dell, Kroger, Macy’s, Nike, Sephora, Target, Victoria’s Secret, Walgreens and Yeti. These brands apparently make up nearly the majority of all US e-commerce volume.

Management told the market that customers will be able to shop at these merchants through the Afterpay app. Customers only need to select their preferred merchant through the directory and will then be able to pay using Afterpay.

Industry still growing

Online spending has exploded from the onset of the pandemic, but management thinks this trend is likely to continue.

Over the past three months, e-commerce growth has nearly tripled from where it was this time last year.

Management said online spending grew 43.7% in 2020 and another 39% in Q1 2021.

It was also noted that the vast majority of Afterpay’s customers make purchases through its shop directory in its mobile App. On average, Afterpay generates a huge 31 million leads to its merchant customers on a monthly basis.

Summary

This seems like a big positive for Afterpay as its platform will be exposed to such a large existing audience. At Afterpay’s current valuation, one might wonder how much of this growth has already been factored in.

The BNPL sector is certainly getting more crowded. Just recently, it was revealed that PayPal wants in on the booming sector through the launch of QR codes that make the checkout process quicker, cheaper and more secure.

Even the big four banks are trying to get in on the action. The Commonwealth Bank of Australia (ASX: CBA) just recently announced it will launch its own BNPL offering.

BNPL’s have an undifferentiated product offering which could result in fairly low switching costs. I’d typically look for companies with high switching costs as per the Rask investment philosophy.

For an example of shares with high switching costs, click here to read: My top 3 ASX software shares for June.  

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