As the Australian market matures whether or not Afterpay can deliver the growth baked into its share price remains a divisive question.

By financial 2022 Afterpay is tipped to have 19.1 million users with 100 per cent of the user growth from overseas.
The bull case rests on success in North America. It is expected to grow from 5.6 million users in June 2020 to 11.9 million by June 2022.
Users in the UK and European Union are tipped to grow to 3.1 million by the 2022 financial year, after Afterpay revealed a $82 million acquisition of credit provider Pagantis to launch in Spain, France, Italy and Portugal.
Afterpay also announced plans to launch in Asia via the acquisition of Indonesian consumer credit provider Empatkali. Over the final quarter of 2020, Afterpay reported adding 20,500 users a day.
Morgan Stanley said Afterpay’s initial customer credit limits are low compared to a credit card, which substantially improves bad debt rates.
Afterpay typically knows within two weeks if a customer is struggling to pay it back, whereas a credit card takes up to seven weeks before a customer misses a payment, with the opportunity to max out a limit in-between.
In the 2020 financial year, 90 per cent of Afterpay’s sales came from customers using debit cards.
Afterpay co-founder and US chief executive Nick Molnar. In North America, Afterpay is expected to grow from 5.6 million users in June 2020 to 11.9 million by June 2022. Louie Douvis
If Afterpay grows overseas the Australian track record suggests it could scale profitably.
In financial 2020, Afterpay reported its net transaction margin (NTM) climbed to 2.3 per cent. As a proxy measure of the gross profit Afterpay makes on every transaction analysts regard NTM as a key measure of scalability and profitability.
For example, if the NTM turned negative, Afterpay would be accumulating bigger losses the more it grew, assuming operating costs were fixed.
The NTM is calculated by taking total merchant income from transactions less finance costs associated with receivables funding, bad debt costs, and other fixed transaction costs.
In financial 2020 Afterpay’s self-styled approximation of gross profit landed at $250.2 million, or 2.3 per cent of the total transaction volume of $10.85 billion.
Wilsons has an overweight rating and $102.23 valuation on Afterpay shares, assuming it can deliver a long-term NTM around 2 per cent, despite newer international markets meaning higher bad debts.
Brokers note that bad debt costs as a percentage of sales should, in theory, fall as a market matures, due to transaction volumes coming from a higher percentage of the most credit-worthy repeat customers. In 2020, 90 per cent of underlying sales came from repeat customers.
Morgan Stanley’s base case is for Afterpay to grow revenue from $519.2 million to $920 million in financial 2021, which equals growth of 77 per cent.
Its $106 share price target equals a valuation of $30 billion based on 283,444,937 million shares on issue. This is 810 times the broker’s forecast for $37 million in net profit and 32 times its revenue forecast.
On brokers’ consensus estimates it equals around 34 times revenue forecasts of $888.1 million and 4554 times net profit forecasts of $6.7 million.
Morgan Stanley acknowledges the shares could be wildly overvalued if Afterpay’s overseas growth is slower than expected, or if online shopping rates slow due to logistical disruption related to COVID-19.
If the broker applies a multiple of 7.5 times its estimate of 2021’s revenue, the valuation is just $26.25 per share.
Broker UBS has a sell rating and said Afterpay shares are worth just $28.25.
It said the consensus sell-side community continues to ignore or under-estimate the capital required to fund Afterpay’s international growth.
UBS also said the impact from COVID-19 remains unpredictable, with cash handouts to consumers in Afterpay’s target-age market such as JobKeeper and JobSeeker due to be wound back towards zero from September 2020.
According to the broker, long-term execution, competitive, and regulatory risks remain. It questions whether regulators in Australia will continue to let Afterpay ban merchants from passing on surcharge transaction costs to customers, as commonly happens in the hospitality industry for example. The RBA’s surcharging ban review is due 2021.
UBS’s valuation assumes a long-term NTM of 2 per cent and $51 billion in gross merchant sales by financial 2025. If Afterpay delivers more than $200 billion in merchant sales by 2025, UBS said shares are worth $125.
The uber-bulls agree that if Afterpay delivers a similar growth trajectory to $US240 billion online payments giant PayPal the stock could still be cheap. However, if UBS’ bearish view around the risks is correct, today’s investors face 69 per cent downside.