Afterpay Touch Group Ltd (ASX: APT) shares have taken a tumble over the last week and they now sit marginally above $20. Could shares fall below $20?

About Afterpay

Afterpay Touch is the owner of the popular “buy now, pay later” app. As of early 2019, Afterpay had over four million registered users worldwide, making it one of Australia’s true technology success stories.

Recent Announcements

The main triggers for the Afterpay share price decline were a $300 million capital raising and the announcement that AUSTRAC sent a notice to Afterpay requiring them to appoint an external auditor to look into their ‘Anti-Money Laundering/Counter-Terrorism Financing’ (AML/CTF) program. You can read more about that announcement here.

The share price continued to decline when Afterpay released a response to ASX queries. This could mean that investors were unsatisfied with the response, or it could simply mean investors are worried that the ASX is questioning Afterpay’s reporting.

Has the decline been an overreaction? Possibly.

It has been well-documented in behavioural finance studies that investors tend to react more strongly to negative news than to positive news. Especially for a company like Afterpay, which many say is overvalued, investors may be overly reactive to any negativity that the company faces.

What Happens Next?

No one can say for certain whether the share price will recover today or continue falling. Instead of speculating on the short-term direction, investors should be asking themselves a couple of key questions:

  1. What is the probability that AUSTRAC finds an issue with Afterpay’s conduct between January 2015 and today?
  2. If an issue is discovered, what penalties, if any, could Afterypay face and how will that affect their cash flows?

Investors should use these two questions to determine what effect this audit could have on Afterpay’s future cash flows and growth, and then use that information to adjust the discounted cash flow (DCF) analysis they have surely used to value the company. This Rask Finance video explains, step-by-step how to value an ASX company using DCF analysis:

Summary

I won’t speculate on the direction of the Afterpay share price in the short run. Investors should approach this logically with an assessment of future cash flows and any damage to reputation that the audit could potentially cause, much like they should approach any other business risk.

Personally, I’d be more comfortable investing in one of the growth shares mentioned in the free report below.

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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 writing, Max does not own shares in any of the companies mentioned?