We got lucky. A few days after our last wire, discussing two stocks to watch, one of them, Afterpay, released a positive business update and the share price exploded, gaining in excess of 30% within a matter of days. Reading market commentary, a common perception is that Afterpay is overvalued at its current price. The real question is: how do you value a company that is growing at an almost exponential rate?
We consider the major growth avenues below:
Afterpay also possesses a number of sources of unquantified value, namely:
We consider the P/S ratio a reasonable valuation heuristic for a company experiencing rapid growth above 100% per annum like Afterpay. We would consider a P/S ratio of 1 times to be reasonable for an ASX listed company however, if a dual-listing was pursued in the US markets (for example, on the NASDAQ) we would consider a P/S ratio of 2 times to be most reasonable in that particular market.
We note the latest business update disclosed the annualised gross sales were running at circa $3 billion. We anticipate Afterpay in 12 months to be achieving minimum annualised gross sales of $5.5 billion, with the US contributing over $1 billion to this figure. Using the P/S ratios above, this equates to a share price range of between $25 and $50 assuming no further equity is raised.
We applaud the efforts and decisions of management to date and are enjoying watching the evolution and growth of another great Australian company.
Disclaimer: This article does not take into account your investment objectives, particular needs or financial situation; and should not be construed as advice in any way.