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Financial Performance

In the year 2020, Afterpay’s share price started the year at $30.63 on January 2^nd, and reached up to $104.53 in September. This meaning that over the course of 2020, Afterpay has had up to a 240% increase in its share price. Figure one shows a graph sourced from Yahoo Finance showing Afterpay's share prices over the last year (December 2019 - November 2020). Despite Afterpay being on a rise during the year, it experienced a 20% decrease in share price during the period of August 25^th to September 14^th, largely contingent upon competitors entering this market. The most prominent reason for this drop in price was Paypal entering the market with their ‘Pay in 4’ scheme. On the day of Paypal’s announcement, Afterpay’s share price dropped 8%. This suggests that the threat of competition within the buy now pay later landscape is high and may continue to experience new players entering the market.

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Figure 1: Share Price of Afterpay over the course of 2020

Since Afterpay’s initial public offering in 2016, the company has never recorded a positive annual net income. This meaning that they are not earning enough revenue to cover expenses, as their Q2 2020 results showed they made a loss of $19.7 million (AUD)  and a negative profit margin of -4.39% (AUD). This has also meant that earnings per share has always been negative i.e. investors who hold Afterpay stock are not gaining any income from holding this stock. Therefore, this is of importance for investors who hold stock for the primary purpose of gaining dividend payments and therefore must be noted that currently, that is not achievable with Afterpay.  However, it must be mentioned that Afterpay is still in the early stage of the business life cycle, and that “startups that are just getting off the ground might need time to build up sales and profitability”.

Other financial performance metrics to note include (as of November 18, 2020):

·      Afterpay has a market capitalisation of 28.36 billion AUD

·      At the end of the 2020 financial year, they achieved a total revenue of $450.38m AUD, an increase of 106% compared to the prior financial year

·      $1.6 billion AUD of total assets

·      $469 million AUD of total debt

·      36.77% of shares held by insiders of the business

In regards to the future of Afterpay’s financial performance, analysts have given their predictions on certain metrics. Firstly, among analysts such as Bell Potter, Citi Research, Macquarie and UBS, only Bell Potter anticipates that the company records its first profit in the financial year of 2021. Whereas the overall consensus of these analysts is that Afterpay will record its first profit in the financial year of 2022. In regards to rationalising these analyst forecasts, it is very contingent upon several key reasons. Firstly, Macquarie states this profit is not likely to be achieved in financial year of 2021 due to its expansion in new markets which increases initial costs. Citi group has also expanded on this by stating that they expect Afterpay to have ‘higher net transaction margins and slower cost growth’. Therefore, this showing highly informed analysts predictions for Afterpay over the next few financial years.

Customer Segments

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Afterpay has generated over 15,000 brands and retailers using their services

As of February 28^th 2020, Afterpay was recorded to have 3.6 million active customers in the US, 3.1 million active customers in Australia and New Zealand, and 0.6 million active customers in the UK. It is also noted that this US customer base has increased by 443% since the same time last year (Q3, 2019) and has over 15,000 brands and retailers sign on as vendors and partners.

Millennials comprise 75% of Afterpay’s customer base and are thus, are their main customer segment. Another significant segment of Afterpay's customer base are university students, of which a third have been found by a study to resort to short-term borrowing. Furthermore, this study proved that there was a positive significant coefficient between a student using Afterpay, not paying off their credit card bill in full, having a low savings account balance and needing to borrow for emergencies. These variables within the positive relationship are intuitivised by Afterpay’s services as it this study posits that millennials who are more likely to use Afterpay are subsequently less likely to pay bills upfront.

Another customer segment Afterpay targets is that of young women. Routledge-published book ‘Women, Consumption and Paradox’  proclaims there to be a gender gap in marketing techniques in the consumer world, and conversely uses Afterpay as a case example to portray how they have experienced success in marketing to women. This study states that Afterpay has been ‘extremely popular among young women’ and has garnered a loyal customer base, proven through a Facebook group being created titled, “We love afterpay”, which has over 124,000 members.

Another segment that is exploring the use of Afterpay is the medical industry. The Ethics and Medico Legal committee recommend that buy now, pay later services such as Afterpay should be accepted for use by patients for methods such as cosmetic medical or surgical procedures. Therefore, this would mean that Afterpay would be able to access a new customer segment that differs from the typical retail shopping market that they already target. However, this article makes wary that “doctors must not promote these products (Afterpay) to patients and instead only inform them that they are available”. This is so it does not leave those who have poor financial literacy susceptible to undertaking surgeries that they cannot repay.  This is a risk in this industry as Afterpay services do not conduct extensive credit risk checks and hence could leave companies who adopt this business offering at risk of not receiving full payments for their services.

Growth over the Coronavirus Pandemic

During the COVID-19 pandemic many retailers closed physical stores, as well as customers being more hesitant to physically shop. Subsequently, leading the Australian Financial Review to comment that Afterpay’s growth is being spurred by "investors [who] are seeking exposure to e-commerce as the coronavirus crisis pushes more shopping online, and continuing government stimulus will keep bad debts low”.

Another reason for this growth during COVID-19 is the economic climate. The coronavirus has caused an extensive amount of jobs around the world to be cut, and wages decreased. In Australia, more than 700,000 jobs were lost in the first week after extensive business shutdowns and social-distancing limits were introduced, alongside a wage decrease of 6.7% over three weeks since that introduction, mostly predicated on younger workers. Henceforth, it has meant that for many civilians, discretionary income has declined. This then becomes conducive to ‘buy now pay later’ schemes as customers whose weekly cashflow cycles have decreased can still sustain purchasing needs without any additional cost of interest.

Given there is yet to be a vaccine developed, and the coronavirus is continuing to plague society, we have no binding timeline as to when society can return back to normal. Subsequently, analysts assume that Covid-19 will still gravely affect the world in 2021, thus being beneficial for Afterpay services if 2020 is any example. IBISWorld senior industry analyst Yin Yeoh states “Covid-19 is expected to increase the unemployment rate, and contribute to weaker consumer sentiment and lower real household incomes in 2020-21, spelling disaster for the retail sector. However, buy now pay later service providers are likely to benefit from consumers using industry services for essential items”. Therefore, if this prediction holds, it means that consumers around the world will struggle to maintain discretionary income that satisfies their purchasing needs on a regular basis, and hence likely to further use services such as Afterpay, thus creating opportunity for more growth. Moreover, if this pandemic continues throughout 2021, it is likely that physical retail stores will remain closed and thus increasing usage of online shopping. Therefore, if we use 2020 as a case study, it would mean that Afterpay will continue to experience growth as attributable to the Covid-19 pandemic.

However on the contrary, the development of a Covid-19 vaccine could see Afterpay's growth stunt. This was insinuated by the recent news of American pharmaceutical company 'Pfizer' declaring that their Covid vaccine is '90% effective'. Over the following two days of this announcement, Afterpay's share price dropped 11.5%, showing that transition into a post-covid world may stunt Afterpay's growth experienced over the pandemic.

Impact on the retail landscape

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Afterpay has been attributed to being one of the causes in decreasing use in credit cards

Afterpay was one of the first companies globally to introduce the ‘buy now, pay later’ concept which has now added a new dynamic to the retail landscape. A major driver for this change is the decreasing use of credit cards. The 2019 RBA’s Credit and Charge Card statistics showed that from 2018 to 2019, the number of credit card accounts dropped nearly 5% from 16.7 million to 15.89 million. It has also been stated that “the value of balances on personal credit cards accruing interest is down $4.2 billion since March” and hence showing diversion from credit cards into alternative payment methods, such as Afterpay. Moreover, Afterpay’s disruption to this traditional credit card landscape is proven through it being reported that 69% of millennials are using their credit card less as a result of Afterpay. This is then coupled with the fact that millennials are estimated to account for 1 in every 3 dollars spent, therefore rationalising why retailers are heavily investing in buy now pay later methods such as Afterpay.

Further proof of Afterpay’s high adoption with millennials is shown in studies. A recent study of university students in Australia states that there is a positive coefficient for a student’s use of Afterpay and not paying off their credit card bill in full. Therefore, Afterpay’s split payment approach is considered more conducive to these student financial preferences than credit cards and hence why this company is contributing to changing the traditional retail landscape. Further, Afterpay has been touted by marketing commentators to be one of the few successful companies that have adapted marketing techniques to address both genders, and thus being “very popular with young women”, again suggesting how this company is diverting from the traditional retail landscape to a more modern approach.

However, in regards to this changing retail landscape, there have been concerns that Afterpay may create excessive risk for consumers as “consumer advocates warn that this modern day lay-by service leaves Australians at risk of spiralling into debt”. This is caused by Afterpay not using credit checks such that its services are available to everyone regardless of their financial circumstances. Therefore, it creates risk for both parties, and given the buy now pay later services are still very new, the economy is still not fully aware of the risks associated, as customers may increase their debt levels, and businesses may not receive full payment for their goods/services. Furthermore, there is concern that this industry is not regulated like other financial services, again showing that there is a level of risk to Afterpay’s involvement with the changing retail landscape.