Has anyone else noted the ‘AfterPay’ logo on some online shopping websites? It’s a payment option on popular online shopping sites such as The Iconic, Country Road, Booktopia and so forth. It even has RM Williams on board if you wanted to buy a pair of those Craftsmans for that North Shore look.

 

Afterpay Touching Holdings (Afterpay) is a payment system that works through instalments – you purchase the item and every fortnight you pay four equal instalments. For example, if you bought a Dyson vacuum cleaner for $400, with Afterpay, you’d pay four $100 instalments for four fortnights until it’s paid off. These instalments are interest-free, which makes Afterpay the perfect payment system for large ticket items that you’re trying to purchase but can’t afford to put up the cash upfront. This works especially well as you can spread out the cost of the item over eight weeks instead of paying large sums upfront.

Sounds great right?

 

Afterpay generates a significant majority of their revenue from merchant fees – a fee paid by retail clients who choose to offer customers Afterpay as a payment option. A smaller proportion of their income is made from late fees when customers are unable to pay off their monthly instalments. However, Afterpay reported that less than 1% of their users paid instalments late.

As of this article, Afterpay has over 200 merchants using their payment system including large retailers Officeworks, Myer, David Jones and smaller boutique retailers. This showcases its growing popularity and scale.

 

So why is this a great investment? Firstly, it’s a bit of a penny stock, trading at the $3 mark right now. Afterpay has been around since 2015 but has only started to gain traction online. It has a high customer retention rate, with roughly 65 per cent of users being repeat customers. The scalability of Afterpay makes it a desirable investment – it’s already been shown to be incredibly popular with retailers domestically, and it might be a matter of time before they spread either internationally or spread to other industries.

 

Afterpay’s technology makes it another attractive investment. The platform operates using a ‘Transaction Integrity Engine’ which conducts fraud and repayment assessments for potential users to determine whether there are potential risks to Afterpay. This allows Afterpay to minimise risks and bad debt. Interestingly, this intellectual property is owned by Afterpay and would make for a great acquisition by a much large company in the future.

 

This all indicates to the future price of the stock rising higher than its current price in the near future. It has already doubled since May last year and there is still much more room for growth if their popularity continues to increase and their online presence grows, the stock could easily rise in the next 12-24 months, leading to significant gains for investors.

 

However, Afterpay comes with some significant risks. Firstly, in their payment system, Afterpay actually pays the merchant for the item, and the customer (you) pays back Afterpay through the four instalments. This means Afterpay is operating with significant capital requirements and the exposure risk to a lack of capital is quite high. Secondly, Afterpay relies massively on strong relationships with retailers. There is no guarantee that this relationship will continue or whether relationships with future merchants will be successful, and the success of the company depends on them building great connections with retailers. Lastly, exposure to bad debt or customers who default on payments poses another risk. Although their algorithm provides some risk management, it would be impossible to remove all risk exposure altogether.

 

Despite these risks, Afterpay is still a fantastic low-value stock to buy into, especially as the Australian online economy and retail market continue to grow. It has an attractive business model and has many opportunities in the market to continue to grow. Moreover, it’s currently experiencing substantial levels of growth and is looking to expand in-store to allow for customers to use Afterpay in-person, rather than just online.

 

Lastly, with the movement of Amazon into the Australian market and the online retail economy looking to get disrupted, Afterpay’s scalability makes it an incredibly attractive buy if they can partner with a large disruptor such as Amazon. This is purely speculative at this stage, but the market opportunities are ripe for the taking.

 

If you’re thinking about buying into Afterpay, this is one you hold onto for the ride. It might just be the next ‘big thing’ in online shopping.

 

Albert Patajo is a final year Law/Science student currently writing his Law Honours thesis in financial market regulation. He has a small but growing portfolio spread across the ASX and other markets. If you want to learn more, he is more than happy to help other students start their journey in the ‘stock market’.