SHARES: Afterpay (APT.AX) Back In The Spotlight

*Afterpay tumbles after UBS initiate with a A$17.25 PT
*Excessive growth priced in without commensurate risks
*Competition and regulatory hurdles underappreciated

UBS throws a spanner in the works

Afterpay (APT.AX) shares have fallen -8% in today's trading making it a cumulative and precipitous -20% fall from the highs of A$37.41 since UBS initiated on the stock mid-week. The damning research report which gave APT a 12-month price target of A$17.25 has driven some sensibility into the excessive herding behaviour that has seen it blossom into a much favoured ASX tech darling.

Afterpay (APT.AX). Weekly timeframe. Source: ThinkMarkets

UBS were expressed in their synopsis of where the stock was at, at the moment, saying "the market is pricing in excessive growth for APT without factoring the [downside] risks". Indeed, the bearish view contrasts the lofty expectations that have been put on the Buy-Now-Pay-Later (BNPL) first-mover by other banks such as Goldman Sachs and Morgan Stanley. We covered this in detail in our previous note SHARES: Full Speed Ahead On The Afterpay Treadmill

To be clear, Afterpay is very much still the poster boy of the BNPL industry and has a lot of good things going for it. But, like any stock investment, you'd be remiss not to question the potential excessive valuation at current share prices and the underappreciation of regulatory and competition risks to the business. This is exactly what UBS have detailed in their note, putting it on a platter for the cultish Afterpay following. 

Growth targets could be difficult to reach...

UBS have demonstrated that at current stock prices the amount of sales (what platforms like eBay and Afterpay call Gross Merchandising Volume, or GMV) and market penetration needed to fulfil market expectations by 2025 and 2030 would be over the top. APT's underlying sales would have to increase 20-35x from FY19's A$5.2bn and around 12.5% of the US and UK market would also have to be penetrated to some extent. As ambitious as Afterpay are, it opens the door to downside risk and significant repricing should they fail to stay on the expectations treadmill. 

...Because of competition and regulation

Last time we spoke about the growing number of entrants into the BNPL industry on both a local and global scale as the space develops. That argument still stands. In fact, one thing to note is that the US is more competitive than the Aus/NZ complex and APT won't be afforded the same advantages that come with being a first-mover in Aus/NZ. Therefore, it ought to be of greater difficulty to penetrate.

Furthermore, on the regulatory side, the RBA will purportedly investigate whether legislation is required to target BNPL players who prevent vendors from passing on the costs to customers. This was a key component of the looming regulatory downside risks UBS all so easily highlighted in addition to whether APT would be constituted as credit in the future. Both competition and regulatory risks have been underappreciated from a valuation standpoint and could lead to further repricing in the near-term as markets acclimatise to their potential.