I would much rather buy shares of Altium Limited (ASX: ALU) than Afterpay Touch Group Ltd (ASX: APT) at the current prices.
Both Altium and Afterpay are two of the most sought-after ASX technology shares and both of them have quite exciting potential.
On the face of it, Afterpay looks as though it’s doing better. But, for (at least) three reasons, I would prefer Altium:
Altium is profitable and rewarding shareholders
Altium has been generating a profit for its shareholders for a number of years. A business is materially less risky if it is already generating sustainable profits year after year. There is somewhat of a floor to the valuation, such as if you put a low price/earnings ratio (eg 10) on the company.
With Altium creating profits, it is able to return some of the money it’s making to shareholders. It’s important for every investment that you know how you will access the value created by your investment – dividends is a popular way. Altium aims to increase its dividend. Afterpay obviously doesn’t pay a dividend
How much is a business worth if it’s losing money? I think it’s only worth more than $0 if there is a clear path to profitability. Afterpay clearly does have a path to profitability, it is just investing heavily to grow for now. It’s much easier to value Altium because it’s already making a profit.
Investors do expect Afterpay to make a profit at some point, but it’s at least a couple of years away. Looking at the analyst estimates provided to Commsec, Afterpay is expected to generate earnings per share (EPS) of 27.2 cents in FY21, meaning it is valued at 75 times FY21 earnings.
Meanwhile, Altium is expected to reach EPS of 86.3 cents in FY21. That puts it at under 39 times FY21 earnings, meaning it’s about half the valuation.
Fundamental Differences Of Customers
Both businesses are predicted to do wonderful things to 2025. However, I think that Altium’s customer base of companies like Tesla, Apple, Google, Space X, Toyota and so on are much higher quality than Afterpay’s customers who are looking for cash flow funding for their purchases.
There is a decent chance that one of Afterpay’s rivals, local like Zip Co Ltd (ASX: Z1P) or FlexiGroup Limited (ASX: FXL), or international ones, will cause problems.
In my opinion, for Afterpay to justify today’s valuation, it almost needs to become the chosen form of payment for a whole generation of Aussies, Americans and British. Sometimes people can be fickle. Altium’s customer base is much stickier, around for the long term and will likely provide much better recurring revenue.
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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).
Disclosure: At the time of publishing Jaz owns shares of Altium, but that could change at any time.