MELBOURNE (Reuters Breakingviews) - Afterpay shareholders are destined to learn what its customers already know: a bill for the purchase-induced endorphin rush eventually comes due. The Australian financial technology champion just reported more impressive growth as the buy-now-pay-later model gathers pace around the world. For the many investing enthusiasts, it will help justify a 1,500% run-up in the share price from a trough nearly a year ago, but there are plenty of reasons to question the valuation.
Merchants and young shoppers relish the modern version of paying for clothes and cosmetics in installments. Afterpay reported that it more than doubled the value of transactions to A$9.8 billion ($7.8 billion) over the six-month stretch to Dec. 31 from a year earlier, with a similar jump in its own top line. New customers and vendors keep signing up in droves.
Despite the heady growth, it takes mental contortions to rationalise an unprofitable enterprise trading at some 30 times expected sales for the coming year. Afterpay’s own arrangement to increase its stake in its U.S. arm speaks to the doubts. The complex transaction unveiled alongside financial results on Thursday implies the division is worth 28% of the company’s entire $30 billion market value. And yet North America accounted for 43% of sales in the last half of 2020, growth there was twice as high as the company’s overall and the region is home to 60% of active Afterpay customers.
Competitive threats also are mounting. Big banks and financial startups such as Affirm want a piece of the action. PayPal is rapidly turning into a formidable rival too. It recently rolled out a buy-now-pay-later option in multiple countries for all merchants that already accept its flagship electronic payments. “I’ve never seen a product launch with that kind of scale so quickly,” PayPal boss Daniel Schulman said earlier this month.
As the whole industry grows there is bound to be greater oversight of interest-free point-of-sale loans. Australian consumer groups are railing against a new voluntary code while Britain’s Financial Conduct Authority intends to crack down on such services. That might help explain why Afterpay is trying to leverage its popularity to expand into new lines of business, including teaming up with Westpac in digital banking. Even so, expectations are too high that everything will go right, and investors buying now should expect to pay later.
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