Chit Chat Stocks - Afterpay (APT) | Deep Dive

Episode Date: May 16, 2021

Afterpay (OTC: AFTPY) is an Australian technology firm that offers payment solutions. The company partners with merchants to offer customers the ability to buy now and pay later. Listen in as Brad, Brett, and Ryan dive into how the company operates and how Afterpay can grow from here. As always enjoy the show! Subscribe to Potential Multibaggers: https://seekingalpha.com/checkout?service_id=mp_1308 Follow Brad and check out his work on Twitter: https://twitter.com/StockMarketNerd?s=20 Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:45) Industry | (6:49) Management & Ownership | (8:35) Valuation | (10:29) Earnings | (12:07) Balance Sheet | (14:08) Our Analysis | (15:48) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Sunday Deep Dive episode. My name is Brad Schaefer. I'm here with Ryan Henderson, and we have Brad Freeman back. Brad, you took a little absence last week. You were on

the DL. Medical injury. I don't know how much you want to share, but how are you feeling this week, And are you ready to talk after that? Yeah, so 10 Day DL, I made my debut with a ball league performance for the year and gotten pretty nasty pickle and rundown and I walked away with a concussion. So I know it sounds pretty heroic, but try not to be too intimidated. I'm just a man. But yeah, I'm almost back to normal and definitely good to go to talk about Afterpay. All right, we're going to talk Afterpay.

but before we do, we have to talk about our sponsor, Potential Multibaggers. Potential Multibaggers is a service on Seeking Alpha that aims to find stocks that can go up 10x over the next 10 years or compound at 26% per year. Some of the picks that they had in the past, and we can't share all of the recent ones, obviously, that's proprietary, but they've picked Shopify at 77, C Limited at $54 a share, Livongo at $24 a share before turning to Teladoc. And Chris, who we've had on the show before, he invests in all of these picks himself. He alerts you when he buys and what he's constantly communicating with you so he can help you not only find good stocks, but manage your portfolio as well. Anything? Okay. Yeah. We

got to do the call to action. Oh, Ryan, you have something else. I'd also add, I think he's one of the uh i think emotional maturity is in strength yeah see it on twitter yeah he uh i think he has a lot of temperance am i using the right good temperament temperament temperament yes and speaking of that if you want to become a multi as they as they call themselves you can go on seeking alpha and look it up uh at from growth or from growth to value excuse me google it or you can go to at from value on twitter find it pretty easy to find all right let's talk after pay ryan do you want to introduce the company? Yeah. So it's one of the world's leading buy now, pay later payments providers. So if you're not familiar with the way

that kind of model works, let's say I'm shopping at Under Armour.com or Gymshark.com or I think Lululemon.com. Those are all three customers actually. And let's say I find a few things I like, I add them to my cart and then I go to checkout. You fill out all the shipping stuff and then it goes and it says, what are you going to use for your payments? So you can use like credit debit card. Those are the standard ones, PayPal, or you can use Afterpay. And so Afterpay allows customers to split the order into four separate payments, interest free. So the customer would pay 25% upfront when they do it that way, except I believe Afterpay fronts that cash and you just pay Afterpay the 25%. Then the other three payments would be done every two weeks.

so it's a six-week process. I think you can pay at any point between then before the six weeks, but it's basically a microloan with no interest. And afterpay, the way they make money is they take a percentage of the total order, which it calls its afterpay income margin. So this was about 3.8% of the total order. And so if you're sitting there thinking like- And that's like take rate, correct? Yeah, essentially. And so if you're thinking why on earth would the merchant just give away 3.8% of the order, it incentivizes more spending. And so average order value, the basket size went way up. A lot of the merchants saw it go way up when after pay started getting offered because people, you know, they automatically think they can afford more

because they're paying it out over a longer period. So it just makes sense for merchants to start to offer it. As far as like for after pay side, I believe they go through a small background check when someone signs up. If that person doesn't pay by the due date, they get a late fee. And if a late fee isn't paid, then the customer isn't allowed to use after pay again. Yeah. So new customers can kind of have, you know, they might have a decent loss rate on them, but once they kind of churn out any bad customers, it's almost like a filtering process when they get them on. So their theory is over like, say a five-year period, that loss rate on a certain cohort will go down over time and there is there is a bit of a so this is more

for smaller stuff i think the av or the max order size like a thousand dollars uh two thousand australian dollars so yeah similar yeah oh okay probably 1500 or something like that but uh if you there is like a legal classification where if you uh offer something that extends out longer than six weeks it has to be qualified as a loan so it has to be interest-bearing whereas if it's Less than six weeks, which is what this is, it can be interest-free. And the reason that they keep it so low is because, I mean, if you're paying something that's really expensive, and this is sort of where Affirm, which is one of their competitors, dabbles in, is if you're paying for something that's really large, you can't really pay it down in six weeks. You might as well just pay it all up front. So that's why they've found this kind of little middle ground.

But I'll get into the history. Anthony Eisen and Nick Molnar co-founded Afterpay in 2014, might have been 2015, in Sydney, Australia. Molnar grew up in Sydney and he used to sell jewelry on eBay in college. And he apparently became the number one Australian jewelry seller on eBay. So he's grown to be pretty good at marketing. And then Anthony was his neighbor and they came up with the idea and launched it when I think Nick, who's the CEO now, is 28 years old. And then basically, their marketing strategy was they encouraged all the early customers or the consumers to ask their merchants or their favorite retailers to accept the solution. So they kind of did the

marketing for them. They now have more than 75,000 active merchants. They went public in 2016 at a market cap of 125 million. So think about that. Founded in 2014, 2015, $125 million market cap IPO within a year or two. Yeah. And I'll have valuation later. It's a lot bigger today. So Yeah. So it grew really quick. I think they had exceptional product market fit. I think a lot of people were looking for this. Do you want to hit industry and landscape? Yeah. So it's hard to evaluate because they're kind of going after consumer credit here, but they're also trying to kill credit cards. It's a big part of their value or proposition to consumers is dump your credit card that has interest, join after pay. So that

is a large part of the consumer credit market. So it's kind of weird. They're trying to kill it and joining at the same time. But projections for the buy now, pay later market, or BNPL, as you might see it in like stories and stuff like that, that's referencing things like afterpay. So it's projected to grow at a high double digit rate in the US over the next decade, possibly hitting $300 billion in annual volume. Again, these are estimates though, and right now it's a lot smaller. As of the Fed's estimates though, and by that, I mean the Federal Reserve consumer credit card debt in the US is a tad under $1 trillion. So you could argue that's part of their market opportunity as well, although it isn't the entire, you know, there's some things

like Ryan said, that aren't meant to be paid under this buy now play later format. And total, you know, transaction volume for credit cards are in the trillions. So the market opportunity is clearly large. And then competitors include, and there's many out there, but the big ones include Klarna, which is from Europe, Affirm, which is from the US, and then there's PayPal, which is pretty global, but from the US and PayPal, you know, does a lot of other things, but they just announced it. I think either a few months ago, I remember seeing that. Don't know if the product's rolled out yet, but that's a big one to watch because they already have hundreds of millions of users established. And obviously, you know, banks could start doing

this as well. Anyone that has access to consumers, personal finance. I think there's also one, I think that's headquartered in like Minneapolis or something. It's called Sezzle. so yeah there's a there's a ton yeah for sure all right uh brad you want to go management ownership yeah and i mean i've heard rumors just going back to competitors that upstart's going to join in and you have to think master mastercard and visa and and mx are eventually going to try and emulate this if it becomes that successful which it looks like it is becoming um but in terms of management and ownership uh pretty large representation 55 of the floats held by institutions and 36 percent is held by insiders. So always like to see that. Co-founder and CEO. Well, we talked

about the founders already, but I just, I listened to Nick and Anthony talk a little bit. For those of you who know me, you know, I love Olo and I love Noah Glass and I got Noah Glass vibes very much so from them. Young, energetic, hungry, modest, and really enjoyed listening to them speak. They seem very bright. The CFO, so just for an executive team highlight, is the former senior vice president of finance at visa so in terms of who you want in that cfo role i can't really imagine a better person she's also worked as a former vice president at schwab um so pretty impressive management team and a lot of ownership too yeah do we have and it's tough because we don't have them on uh they're only on the otc markets in the united states it's tough because

they're listed on australia we don't have the full like do they even have a 20 f they might have it. I think they have 20. I couldn't find any filings like that. They have extensive annual reports, but yeah, it's, it's a little tougher. You're not getting all the insights as you might get with a large United States company. Yeah. And they report on a half year basis. So those of you that love your quarterly reports, this might not be the company for you. Yeah. It's been a while. Uh, Brad, what do you have? Yeah. And just a note on, um, insider and institutional ownership. I've checked about 10 different sources and it varied pretty widely. so this is kind of a mean and a smoothing average of that but uh but yeah just keep that in mind

yeah yeah it's just kind of the ballpark of where we're at there all right i'll hit valuation quick uh market cap is about 21.44 billion dollars from when i researched it um a day ago so that could change a bit by the time you're listening to this ticker is apt in australia for people who have access to that market but aftpy for those that need to access the otc markets in the united States, since we're almost at the end of fiscal year 21 for them, which ends in June, and they're growing so rapidly as Ryan will get to, I'm going to try to extrapolate the last six months and kind of just blend those together to get a trailing valuation metric. Because if I use the trailing 2020 numbers, it makes it look like they're trailing at way too high of a valuation than

they actually are. But you'll hear these numbers, it's still at a high valuation. So their trailing price to sales under that metric would be 33.2 trailing price to that net margin uh sorry gross net margin or some i wrote the acronym here and i forgot to actually write it down uh it's similar to like a contribution profit but they use different metrics uh so price to that would be about 63.4 so it's still pretty expensive and then price to ebitda is close to 300 i was looking at stock-based compensation to about 200 million options outstanding versus about 289 million share count. So not bad on that front, but we'll hit a little bit of share dilution. And then obviously with this stock, you are definitely not buying it because of the valuation.

You know, those numbers are optically expensive. Well, every investment's a value investment. That's right. That's right. We do know that, right? Yeah. But yeah, it, it, yeah, they are optically expensive. And I'll also, as I dive into the earnings, they use different terminology for a lot of their metrics. So I'm going to try to kind of convert them and translate them to our standard metrics. So when they say underlying sales, that's kind of the eye-popping numbers. That's basically the GMV or GPV. They had $7.6 billion in underlying sales. That was up 116% year over year. The take rate on that was flat year over year at 3.8%. The first half of 2021, their revenue was $323 million up 89% year over year. They're trailing 12 months. If you

base it off that first half number was around $554 million. They had a gross margin of 73 and a half percent. Active customers grew 80% to 13.1 million. They're even a margin, even a margin excluding significant items, which they don't have like some of the stuff's missing, but you know what I mean, you don't know what's going to be adjusted that well. That was about 11 and a half percent. I mean, I think if they peel back a lot of the spending, it is like at its core, high margin business, right? Because it's kind of asset light.

But then their after-tax loss was $61 million. Pre-tax was pretty similar to that. And then active merchants in North America, which is an area they're really trying to expand into, grew 141% to 18,000. Sorry, I think that might've been active. No, that was active merchants. That's merchants. And UK, they're in UK and they're like a different brand called ClearPay.

That was up a ton too. So they're expanding into the United Kingdom as well. Yeah, it was also from a much smaller base. Market expenses were about 22% of gross profit, lower than I would have expected. I mean, all in all, the business is growing at a rapid rate. And I think you're still sort of seeing the adoption of or the power of the product market fit and how much customers, especially our age, Gen Z, millennial, really like this kind of offering. Yeah, it seems like they're getting a lot of growth and they're seeing the operating

leverage. All right, Brad, do you want to hit balance sheet while we wrap up the first half? I'd love to. So balance sheet and liquidity looks pretty good. Not perfect, but pretty good. $354 million in cash and equivalents. They have another $686 million in what they call undrawn warehouse capacity, which is basically just a lot of credit revolvers that are untapped. And this gets them to their total liquidity metric of $1.1 billion. They have $93 million in interest-bearing borrowings and convertible notes. 1% of that is current, so due within the next 12 months. And the rest of it is not.

The interest on their borrowings carry rates of 1% to 3%, so pretty darn strong. Yeah, no complaints there. Yeah, and the debt and the interest-bearing stuff and all these warehouse facilities are important for after pay because when they basically have to bridge the gap between when the merchant gets their money and when the customer pays. And that's a pretty quick cycle. It's like six weeks, but they still have a lot of customer receivables, which can hurt them a bit on a cashflow perspective. And that's kind of what I'm going to be one of my low lights later. But again, having the, for a company like this, the balance sheet is a little bit more important

because they're almost acting like a bank in some way. They're financing a lot of this stuff. Yeah. And I guess we probably should have looked at the dilution numbers or I should have put, I imagine they're doing a lot of that. A lot of any financing of growth where they can't do it from their own cash. I imagine they're doing it through equity. Yeah. And they have a few, yeah, they have like warehouse facilities in all the different countries they operate in. Not too much complicated, too many complications to discuss in the podcast, but yeah, it's part of the game there. All right. I think that's going to do it. Let's take an ad break and then we're to get to the second half of the show.

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Next up, we're going to hit anecdotal evidence, customer stories. Brad, do you have anything? You ever used AppPay or any of these products? Buy now, pay later? I guess I'll sound like a boomer here, a 23-year-old boomer, but I've never used a...

I guess credit cards are buy now, pay later, but you're paying interest. So that's not cool anymore. but uh no i've never used this before yeah i've never uh no i've never used after pay i don't know anyone that's used after pay um but then again they're just sort of expanding into north america right now uh so we're kind of seeing that adoption uh it's kind of early days yeah they i think 2019 was the year they launched big into the united states so barely two years at all um i don't have any i don't know i've never used any of these things we're kind of not big spenders cash app

which is kind of a competitor because they give cash back well for a card yeah i mean they do cash back i mean anything all of us are using competitors things because it's really just you know it's just spending yeah but yeah the i mean the concept seems strong uh i don't know it's tough though because you were making that joke brad that it feels so similar to to a credit card that you just worry like, I mean, are you guys just branding this in a different way? But there are some nuances. All right. Ryan, do you have anything? No. All right. Let's get to competitive advantages. Brad, what do you have for this one? I'm going to go back to the management team. So to compliment the two co-founders that I was walked away pretty impressed

with, I'm going back to the CFO and I'm going to sound redundant, but in terms of who you want steering the ship and running the financial statements, the senior VP of finance at Visa, that's perfect. So I think having her insight in the executive boardrooms is really important. And I'm going to keep highlighting that. Especially because Visa is the, they're trying to steal market share and away from them. So. Right. Yeah, I guess I don't know the total story behind her, but I think that's maybe a bit of validation too, if she came from Visa and went after pay as to what she thinks of the business model. I'll get into mine though. Lead gen is what I put as a competitive advantage. So when you think about the after pays platform, there's

basically two sides to it. They've got the merchant side, they've got the customer side, and they're basically in between. But if you look at it from the merchant's view, there's no reason not to accept everything. So I mean, if there's Sezzle, there's Klarna, and then there's after pay you want to basically whatever you want to grant the most access to the customer as possible however they can pay make it easy on them but so there's not really a huge i don't think that unless after pay gives you a deal yeah i mean they have lower rates i believe than clarna but well it's hidden that some they have you know got a bigger like an underarm or somewhere a little lemon i think they give them discounts but so then yeah i guess there's a

a reason to go exclusive there. But I think, you know, if you limit going completely exclusive with just Afterpay can be a little bit risky if other people use Cecil or something like that. But I think the big differentiator is on the customer side. They have, there's sort of like an aggregator of all these shops. So if you go Afterpay, I think it's afterpay.com, you can go in and you can basically shop almost like, it looks like Okta's launchpad kind of thing where for b2b you've got google drive zoom all your different apps that you use on this octa sort of landing page the secure landing page yeah um it's almost like that just in the way that they're launching you to different retail sites i think that's valuable um and then obviously a bit of a

growth opportunity is that retailers are going to maybe advertise to get front and center on that So, I mean, just being in the mind of the consumers, I think there's more value there as far as competitive advantage than maybe on the merchant side. Yeah, there's potential there. And yeah, since the merchants win using the product, it kind of incentivizes them to promote it as well. So hopefully that can give them free marketing. And this is something that it's not really a competitive advantage, but I wanted to mention

that the team seems to be executing from a product and marketing perspective at a rate that is way better than the competition um and that's kind of it could go away immediately you never know someone could leave the company whatever but it reminds me a lot of square like a few years ago um it's different company but the way they're marketing their stuff how unique that stuff is and then the products that they're rolling out it's at such a rapid pace reminds me of that company there is maybe okay maybe it's subtle but i think there's an advantage to their name being kind of perfect yes after pay like if you're if i'm a consumer and i had no idea what after pay was because of the name the title i could kind of guess whereas if i just saw sizzle i'd skip

right past it like yeah i don't know what the hell that means according to and uh for hayden capital wrote a pitch on this is kind of the big you know good presentation we'll probably link it it's like 30 pages really detailed and after pay um it's a year old now but it's still it still works uh apparently in australia where they have the giant the biggest market share they are now like probably just after pay it um but brad what do you think about the name does that does that bring you in more or better than a firm i mean pretty straightforward not a not a whole lot of confusion on what they do um so i think that's always a good quality in a name for sure it's also nice to not have it be like uh uber or something you know something pointless where you're

like yeah what does that even do it's kind of i mean it reminds me of doordash that's a great name as well yeah yeah all right uh but my i my real competitive advantage is basically this network effect i mean think of it in the way of mastercard reason paypal who have consumers and merchants um it's just classic one you know definitely definitely there's not much else to say there but let's hit future growth opportunities uh brad what do you have here Yeah, this is more of a near-term future growth opportunity and not comparative growth, but just more growth for the sector as a whole that I think will be a tide that lifts all boats. But stimulus dollars will keep flowing through into our economy and the other economies that this, that Afterpay is operating in and more monetary supply is, I mean, it's pretty clear to see how that would be a good thing for this company and this industry. My other growth opportunity, and this one might be a little weird, but they cater to a very young consumer base and young people like cryptocurrency.

So maybe venturing into Ether and Ripple and Bitcoin as potential payment plans. I don't know how that would work from a regulatory standpoint or from a balance sheet standpoint, but it would just make afterpay that much more convenient to use. so yeah i might count on that and say that it is crossing the rubicon and loaning with crypto can be very dangerous since it's a volatile asset but that could make sense as a marketing strategy i know square has done really well using uh crypto as a marketing tool so and another there uh it might be good for them to be accepting of it but i think it's sort of on the merchants to be the ones that are like yeah it's kind of on them to accept it uh whether or not because if they don't want to accept it then i don't think there's any way that after pay would use it yeah brad yeah

oh sorry but yeah they'd have to they'd have to build out a sas platform probably in order to to pull that off in terms of just a full service um we we supply the cryptocurrencies we we run the payment network we do everything and it would be a lot it would be a huge undertaking for this company but um yeah it would be it would be interesting to see if them if they or anyone else in the space went that route. Yeah, that's interesting. Yeah, would take a lot of investment on your first note, but the stimulus dollars, I think we've all seen that chart. It reminded me because there was that drop, drop, I always say drunken knowledge drop in Miller, he when he had his op end and stuff, he had the chart of retail sales just

totally going through the roof that are up like three years off of the long term trend. I think if you see that you should expect after paid to have a few good quarters. And if not, that might actually be a bad sign about their market penetration. Yeah. Now I'll get to my growth opportunity, but I think I just kind of thought of one now, which is making easy inroads with like Wix or something. Shopify too. Potentially. I know Sezzle has one with Squarespace. So it seems like a logical step, but Afterpay card is something they've talked about. So this is basically a contactless

MasterCard that can be stored in your Apple Wallet or Google Pay. And it doesn't, I don't see any reason why buy now pay later doesn't work for in person transactions. I think the model still applies. They do have that. Yeah, yeah. And they've, I think that so they've rolled this out in the US, I think in 2019, I'm not sure if they've rolled it out anywhere else. But this seems like a really logical thing to do. And especially maybe it's just my personal bias, but I would like using that. Maybe it's like a US thing, but I like having that card being able to, or at least being able to pay in person. What's weird is I get panicked that I'm going to do it wrong if I do something else. And cards, like it takes like 10 seconds or whatever versus

something that's tap, but I get worried that I'm going to look like an idiot, which is really the only reason I still use card. And I think this is integral to once shopping goes, you know, if there's any sort of reversion away from e-commerce and back to in-person transactions being still a part of that i think they have to have this yeah it would be nice yeah i mean it should apply to in-person versus online should be really the same thing i mean the concept is just to kind of give yourself a steady payment stream instead of having to spend three four hundred bucks all at once but i'll hit mine this is a small one and it's kind of just indicative of another future growth opportunity they have but they acquired

this small company called uh settle up bear it and it has a few other names because it's uh from singapore so the name is in a foreign language but it's a singapore company that does buy now pay later in indonesia they acquired it for two million dollars it's a tiny acquisition right now but really like if they're gonna try to be a global platform sort of like you know the pie in the sky stuff here is like visa mastercard or paypal or something like that you need to establish inroads in these countries early because you want to get that merchant growth rate and the consumer growth rate too because if you say you're 10 market penetrated versus someone that just enters and they're at one percent that is a huge advantage um as you can

see like when visa and mastercard got established and stuff like that it's the moat that you can build up within these countries can be strong so i just think going to those international countries you know take advantage while i can but uh let's wrap things up with the show uh highlights and low lights. Brad, we'll start with you. Yeah, actually, going back to your talk on the acquisition that I mean, just a general note, that is my favorite kind of M&A a company can do just a really cheap, really small acquisition to enter a new territory and maybe to and to collect licensing and permission to operate in a new country. I mean, we see companies like Okta spending billions of dollars on their largest competitor. And I mean, just juxtaposing that

with this i just i prefer that route of m&a so yeah two million versus uh what was octa and not nothing against it but it was like six and a half billion or like three times octa's trailing 12 months old or something pretty crazy but yeah the big difference highlights a little oh sorry no go ahead so my bad uh highlight so for the level of growth that it's posting a 73 percent gross margin and positive ebitda margins is is not something to to overlook i think that's impressive, encouraging, and somewhat unique in this environment. And with that, a transition into my low light, the extremely asset-light, high-margin business model is always going to attract really deep-pocketed competitive entrants. And I don't think that's any different here.

So I kind of almost view this like Robinhood, but with the race to zero commissions among stock brokerages. And maybe if Visa and MasterCard and Amex figure out another way to monetize besides charging interest, this could become a race to zero. And then credit cards would actually be the exact same thing as what this company is offering. So, so that's my low light. I don't know how, I don't know how sustainable this, this moat, I don't like using the term moat very often, but I'll use it here. I don't know how sustainable that is. And the people that are the companies that could kind of come after them are all very deep pocketed and capable. Yeah. And you have Walmart written down here. I think that example does make sense where they have a lot of customer

accounts. They have a lot of customer cards, I'm assuming, and they have a fintech offering coming out. There's no reason they can't do that. But then with Visa and MasterCard, there's also the classic, and this is a cliche, but there's the innovator's dilemma where they're making so much money off of credit cards right now that turning that off would crush their margins. So yeah, you have to take that into consideration as well um ryan what are yours highlights uh well i just really like the business model all in all and i think people under appreciate especially older people i think people my age there is a stigma with credit especially credit cards i don't know anyone that uses them well i guess maybe some but people really don't like credit

cards at our age and there is like this looming fear of getting yourself in personal debt and And there's been a lot of sort of scare stories that you're told, I think, growing up that you don't want credit card debt. No, that's just propaganda from big buy now, pay later. That's just after pay marketing. But then the customer cohort scales pretty well, and it should lean towards the better customers over time. If you just get rid of the people that aren't, if they have a late fee and they don't pay, they can't join. So logically, it gets better as you grow, which lowers the loss ratios. And then I also like the fact that they aren't going, it seems like a company that could go

after some super app strategy. One of those FinTech super apps, just like cash app. I kind of like that they're not doing this and they're kind of keeping their eye on the ball and really focusing on the merchants and just being that easy transaction between the merchants and the customers. So generally I like that, I like management, I like the business model. Low lights for me. I think Venmo would have a really easy inroad to the crowd that Afterpay is going for, especially in North America. PayPal announced they're doing it. I assume they're going to put on Venmo. Yeah. Yeah. And I read something that like they kind of botched it with this. Maybe I was looking at the wrong thing, but it just feels like that could have a really successful

competing product. And that would be the biggest fear because PayPal is already on most merchants payment options uh like available available payment options if you can get some sort of after pay or buy sorry bnpl buy now pay later option with it just seems like it makes a lot of sense yeah the interesting thing about venmo is that they've really it seems like they struggle expanding yeah they've had trouble upselling to more products than p2p payments where cash app has crushed it getting people to use things that actually make money uh for square or PayPal. I don't know. They've kind of dropped the ball a few years in that. I mean, I've, I've gone to like barbershoppers. I mean, this isn't really the perfect fit,

but I've gone to like barbershops where they're like, Hey, do you just take a Venmo? Which sounds like it might be a money laundering scheme. They're like, yeah, but they just don't want to be making a fit. Yeah. And so like, maybe if you can do that with a retail small business, don't out your barber. It's a new barber. Sorry if you listen. But yeah, I mean, that's kind of my low light, I guess it's just the PayPal, PayPal Venmo risk. Okay, I'll hit mine. I'll talk about some of the consumer trends here. I think there's really good consumer trends, as Hayden Capital mentioned in the report. And there's like 10 times as many things here that they really show that the tailwind is phenomenal here. So they mentioned

that only one third of Americans under 30 have a credit card, which is a lot lower than past generations. Makes me feel like it's not outlandish to expect over 100 million buy now pay waiter users in the US at some point this decade. But the question is, as we've talked about, all right, who are they going to go to? Are there going to be people that are using Afterpay, PayPal, and the firm? Are you going to use all of them or are people going to stick with one company? I don't know, but strong execution so far. It seems like they're really outworking their competition. I haven't looked at a firm with Florida deeply, but it seems like Afterpay is executing a lot here. Lowlights though, bad cashflow dynamics. It can look bad, I guess,

on like a, just a timestamp cashflow from a quarter, but with those receivables where they're waiting, like they, you know, they're realizing a lot of this revenue, but they're waiting for the customer receivables that just makes it so they have to, it's kind of the opposite of like a company say, I guess an easy example is like Amazon who can make sure that, or, you know, talk to their suppliers and say like, all right, we're not going to pay you for this for 60 days. We're going to pay it, but we're going to keep this cash. that's a positive working capital dynamic that can help with cash flow but after pay is kind of

the opposite and it's not a giant risk because they're kind of turning over these loans in a six-week period but yeah i don't know and then lastly i'm kind of worried that after pay is just a product and not a company but it seems like they're trying to make it more than just that yeah i i mean i guess the risk is that there's like these high late fees right or people choose not to pay the late fees or whatever, or they don't pay on time. But as we talked about, well, it should get better over time. Even if they pay on time though, you're still waiting for the, to get the customer deposits back. So they have a ton. Then that receivables is only going to go up over time, but their loss ratio has improved quite a bit.

I think the number was like 1% a little while ago and it's down to like 0.7%. So that's a, that's a great. Hey, those late fees are high margin. That's true. That's true. But I think, I don't know if they want to do, I don't know if they they want to juice that over time. I think they're trying to fix the fee part of the credit card industry, but let's wrap things up more or less interested, excuse me, more or less interested, Brad, what do you have here? This was harder. This was harder for me than any other episode we've done, but I think I am going to go with less interested on this one. It's, it checks a lot of boxes, but especially in this field, I am going back to my Robin hood comparison. I just,

i feel like i'd be more comfortable if i was going to have exposure with a paypal or with a visa because i i don't see that 3.85 i think it was percent take rate as being sustainable i see it eroding very quickly when these large deep pocketed immensely profitable companies inevitably enter this space so um it looks awesome right now uh but i i yeah less interest should be i don't know how much longer that can last so yeah do you have any thoughts on like valuation either or well i mean 33 times sales uh is a little more palatable when the margins are when the 73 percent gross margin and positive ebitda margins but i mean in this environment where a company like upstart after a monster quarter raises their revenue forecast 20 more percent um and it

doesn't matter i think high valuation is just going to get penalized and punished no matter what for now all right and i'm long a lot of valuation growth stocks so so i'm saying that fully knowing that or full kind of expecting that myself so yeah it seems like a lot of these stocks i kind of got reminded about this earlier today i read something where there's a big thing that i think the molly fool talks about if you're an individual investor kind of the buying third strategy where you might just nibble a little bit now if you think it's overvalued all right then maybe they execute or the price improves but you know if you want to you might want to just save a little cash on the side. If you really like Afterpay, obviously do your own research,

but the buy-in third strategy can be kind of helpful. But Ryan, what do you have? More or less interested? I'm more interested. The valuation is a bit of a steep hurdle for me. I saw like a Bill Gurley tweet this week that made it a bit of a steep hurdle for me because he's like, listen, if the public markets want to bid up every fintech player to 30 times sales, we have plenty to give them. Yeah, I was like, oh, he's talking about Afterpay. All right. but and it just made you know i think you can sometimes grow immune to multiples after a while um especially when this was trading at whatever 50 or 60 times sales and you're like oh you know this is more pricing it's still a steep multiple to pay so you just yeah i guess maybe take that

third strategy i'd have to do more valuation work yeah it seems like there's a lot of sustainability to the growth i think this could grow at a quick rate for a long time Yeah, within a year. And there's the network effects. Yeah, within a year, you can easily see this sales ratio and even not depends what kind of margins you think they're going to have. Hayden Capital estimated that their Australian margins were 40% at scale. So that's pretty damn strong. But yeah, I mean, you can see a world where the sales ratio goes down quite a bit.

I mean, the historical growth rate, US is going so fast. But again, I'm in the same boat as you guys. I think I'm on the fence. it's maybe slightly less interested just because the valuation is so extreme and if you add that in with the fact that they have a ton of competition coming where yeah if they execute it could be fine but there's just a lot of risk here now like do do visa and mastercard i'm not talking about i'm not talking about visa and mastercard i'm worried about paypal here yeah i would say like if they're making all that money on interest do they want to offer an interest-free micro loan

No, that's the whole thing. Yeah. Visa and MasterCard. The thing is, I don't think they're that worried and Afterpay is still on the Visa and MasterCard rails. So, you know, they're not going to be too upset, but PayPal or someone like that. I think that, especially in the United States, but they have such a high, high inroads with Venmo. Yeah, but we'll see. I mean, there's definitely a world where Afterpay 10X is its revenue from here. I think there's a clear path to execute, but what are the chances of that? I don't know. Yeah, absolutely. All right. We're going to wrap things up but before we do ryan why don't you tell everyone what the stock is going to be for next week we've got wish yeah what is what do they do uh i think there's some marketplace i

don't know i guess we'll see next week but i know they raised capital at like 11 billion in a private round and now their enterprise value is like three and a half billion oh it's come down a lot all right and uh they're an online marketplace so obviously they have a phenomenal moat right because every company that has a marketplace has a moat, you know. Yeah, our friend Sean Emery has tweeted about it a few times. So it kind of caught my eye.

And I think the old head of finance from Square is the new executive chair. So obvious, then it's got to be a buy. She's good. She's pretty good. All right, Brad, anything else before we wrap things up? You know, I have a personal anecdote about Wish.

So that'll be the first time I get to comment in that section. so that'll be fun. I'm excited. All right. A little anticipation there, but that's going to wrap things up for us. Thank you all for listening. As a reminder, check out Potential Multibaggers. And remember that we are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold securities discussed in this podcast. Again, thank you all for listening. We'll see you next week.

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