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Afterpay (ASX:APT) reveals FY20 profitability update – time to buy?

Afterpay Ltd (ASX: APT) has just released an update for its profitability for FY20. Is it time to buy shares?

Afterpay update

Last month the company released an update regarding its expectations for its FY20 profitability.

However, Afterpay now believes that profitability for FY20 will be much higher. The FY20 net transaction loss (NTL) as a percentage of underlying sales is now expected to be approximately 0.38% compared to expectations at the time of the original update in July of up to 0.55% of underlying sales. Essentially, Afterpay is expecting to report lower losses compared to sales than before.

The improvement in the NTL is primarily due to higher than anticipated collections of instalment payments relating to the 30 June 2020 receivables balance that have occurred after 30 June 2020. This in turn translated into a materially lower provision and lower losses than expected in FY20.

Due to the positive change in the NTL, the FY20 net transaction margin (NTM) as a percentage of underlying sales and EBITDA (click here to learn what EBITDA means) (excluding significant items) is expected to be higher than the July update, with the NTM percentage being approximately 2.25%.

FY20 EBITDA excluding items is now expected to be $44 million, instead of the expected EBITDA range of $20 million to $25 million. That’s 96% higher than the midpoint of the guidance range.

Afterpay also disclosed that the provision for expected losses is forecast to be approximately $34 million on a gross consumer receivables balance of $817 million at 30 June 2020.

The July update for the NTL percentage was based on a relatively short period of collections data from 1 July 2020 to 7 July 2020.

Time to buy Afterpay shares?

Afterpay is one of the most discussed ASX shares. Some investors feel that it’s materially overvalued and that long term profitability will be much harder to reach compared to its current fast international growth. Others think Afterpay has huge growth potential for the long term. It could depend on whether it can maintain its merchant margins.

The buy now, pay later business has definitely revolutionised how consumers pay for retail goods. It’s demonstrating enormous growth in the US and it has a lot of growth potential. However, underlying sales growth alone isn’t enough to convince me to buy. I prefer businesses that are making a net profit, like ASX growth share Pushpay Holdings Ltd (ASX: PPH).

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At the time of publishing, the author of this article does not have a financial or commercial interest in any of the companies mentioned.

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