The Afterpay Touch (ASX:APT) share price might be off the charts, but here’s how you can justify the seemingly ludicrous valuation

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The Afterpay Touch (ASX:APT) share price has gone ballistic for a second day in a row, jumping another 12 per cent higher to $15.20.

This comes a day Afterpay shares soared almost 24 per cent higher after the hottest ASX 200 stock provided a quarterly business update showing 2018 underlying sales growth of 289 per cent over the prior year.

Driving the Afterpay share price higher today was likely broker Bell Potter maintaining its buy rating on the shares, and lifting its Afterpay share price target to $21. That’s up from its previous share price target of $10.41.

The broker upgraded its earnings per share estimates for FY 2019 to 13.3 cents per share and 25.3 cents per share for FY 2020.

With Afterpay shares trading at $15.20, that implies the stock trades on a FY20 forecast price to earnings ratio (P/E) of 60 times earnings.

That’s not outrageous, given the company’s growth rate, and more importantly, its future growth opportunities.

This is where the big opportunity lies for Afterpay Touch

While Afterpay’s domestic numbers are very impressive — 10 per cent of the purchasing Australian population has transacted with Afterpay — it’s the opportunity in the US that is really driving the APT share price higher.

In the US, since launching in mid-May 2018, over 400 retailer contracts have been signed.

In its first full month operating in the US — June 2018 — over $11 million of underlying sales were processed, something that took 16 months to achieve in Australia.

The millennial market in the US has a population of 63 million compared with Australia of 6 million. 67 per cent of US people aged 18-29 do not own a credit card.

You are looking at an opportunity that’s ten times bigger in the US than here in Australia. And if Afterpay can crack the notoriously difficult US market, there’s no reason why it can’t take on other parts of the world, particularly Europe.

How a company with $142 million revenue can justify today’s ludicrous $3 billion market capitalisation

Afterpay is forecasting FY 2018 earnings of around $30 million.

Say the Australian market grows to $100 million. Then say the US market is five times as big as Australia, or $500 million. Add on some optionality for other parts of the world, say another $200 million, and you have earnings potential of around $800 million.

Obviously there’s a lot of water to go under the bridge between now and then. And you better believe competition from very well funded players — potentially Apple, Google, Facebook, Visa, Matercard, PayPal — will be attracted to the lucrative space.

But if Afterpay gets anywhere near those numbers, today’s market capitalisation of close to $3 billion will be well and truly justified, and more. 

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Contributors to this article may own shares in some of the companies mentioned in this article. The Capital Club has a thorough disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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Bruce Jackson has 30 years of hands on investing experience. He is passionate about stock market investing, running his own portfolio and SMSF. His focus is on small cap growth stocks. You can contact Bruce at brucej@thecapitalclub.com.au