Afterpay Touch Group Ltd (ASX: APT) has revealed that underlying sales in the first half of FY19 grew 140% to $2.2 billion, does this mean the Afterpay share price is a buy?

Afterpay Touch is the owner of the popular “buy now, pay later” app. Loved by millennial consumers and tech investors alike Afterpay is one of Australia’s true technology success stories.

Afterpay’s first half business update

The flexible payment business reported that underlying sales in the first half of FY19 was over $2.2 billion, up 140% from the $918 million in the prior year.

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Around $2 billion of underlying sales were processed in Australia and New Zealand, with a “significant uplift and contribution from the larger merchant partners. In-store is becoming more important for Afterpay, now representing around 16% of total ANZ underlying sales.

One in four millennials in Australia have now used Afterpay. The average customer age is 33 and rising as Afterpay enters new verticals such as dental. Some of the newest verticals are Village Roadshow Ltd (ASX: VRL) and Luna Park (Sydney). Bupa Optical and OPSM have agreed to rollout nationally in-store.

During 2018 Afterpay transacted with 2.5 million customers and over 21,500 retailers. Some of the newest retailers to use Afterpay online are LUSH Cosmetics, BALLY whilst Nike, Wesfarmers Ltd’s (ASX:WES) Officeworks and Fantastic Furniture are now using Afterpay in-store.

Late fee income

Afterpay’s late fee income is now less than 20% of total income, compared to 25% of total income in FY18. Management reassured investors this won’t have an impact on the business because of the higher number of transactions processed and therefore merchant fees.

In defence of its business model against detractors, Afterpay said: “The strength of Afterpay’s business places revenue from merchants – not customers – at its core and means it can genuinely advocate and reward responsible spending.”

Afterpay said it is looking forward to demonstrating its unique business model as part of the Senate Inquiry.

However, over 90% of monthly underlying sales continue to come from returning Afterpay customers.

Afterpay US update

In the past six months, over $260 million of underlying sales have been processed. More than 650,000 customers and over 1,400 retailers have transacted in the US. Another 2,200 retailers have signed agreements to integrate on the US Afterpay platform.

Some of the new US retailers to go on the platform are Sunglass Hut, Forever21, Kim Kardashian West and BooHoo.

Afterpay is progressing with a US$300 million facility with two US investment banks, which will likely be completed within the next six months to fund over US$4 billion in annual underlying US sales.

Afterpay UK update

Work continues on the UK expansion, most of the work has been done on the technology platform as well as the business processes to support it.

The company has hired a number of key roles including Carl Scheible who had a leadership position at PayPal. Afterpay is making process with retailers and responses have been positive.

Is Afterpay a buy?

Other than the obvious headline underlying sales growth, one of the most positive things about the update was that late fees have reduced. This suggests its average customer is better at repaying, which should mean the Afterpay model is even more sustainable. Net transaction losses were broadly in line with last year, despite the scaling of the US business.

However, whilst this update seemed very positive we didn’t see any cashflow or net profit/loss figures which are the most important profitability figures as important as sales growth is.

Afterpay may grow profit exceptionally well over the next few years, particularly if it keeps growing well in the US and the UK is a success. However, it is priced for a lot of success, so it’s not a bargain hunter’s pick right now.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).