The Afterpay Ltd (ASX: APT) share price is going to be under a lot of scrutiny today after reporting a lot of growth in its FY21 third quarter.
How good was Afterpay’s Q3 update?
The buy now, pay later business reported a strong operating performance in the third quarter of FY21 across all regions with underlying sales up 104% compared to the prior corresponding period.
Afterpay said that if the exchange rates had stayed the same, underlying sales would have gone up by 123% compared to the third quarter of FY20 on a constant currency basis.
Looking at some specific regions, underlying sales in the US rose by 211% and in the UK it rose by 277% on a local currency basis.
Afterpay explained that based on this latest quarter, North America is now the largest contributor to the underlying sales and outperformed the seasonally strong FY21 second quarter.
Impressively, March 2021’s performance outperformed December 2020 and delivered the second highest monthly underlying sales ever recorded, with the US becoming the first region to record more than $1 billion in underlying sales in a single month.
Customers and merchants
Afterpay revealed that active customers increased by 14.6 million – up from 8.4 million a year ago – with North America and the UK reaching 9.3 million and 1.8 million active customers respectively.
Active merchants rose by 77% to 85,800 with a number of major enterprise retailers launching across all regions during the period.
According to Afterpay, its top 10% of customers globally, on average, now transact 33 times per year (or 3 times per month). In the US it’s 23 times per year. In ANZ it’s 62 times per year. Then, in the UK, it’s 29 times per year.
ANZ in-store volumes continue to recover and are now tracking to near pre-COVID-19 levels at approximately 24% of ANZ underlying sales. Afterpay said that the rollout of the in-store in the US continues to progress well with a number of new retailers.
Margins
Afterpay said that merchant revenue margins remained firm in the third quarter of FY21 and continued in line with what was achieved in the six months to 31 December.
Gross losses continued to remain below historical rates in all operating regions. Management also said that net transaction losses as a percentage of underlying sales likewise remained low for the quarter.
US listing?
Afterpay said that it’s currently working with external advisers to explore options for a US listing given the US is now the largest part of the business and is expected to continue to grow.
While Afterpay intends to remain an Australian headquartered company, the shareholder base is becoming more globally focused. Management believe a US listing would further accommodate this growing interest.
There is no timeline set out for this decision.
Summary thoughts
This was a strong update from Afterpay. The underlying sales and customer numbers continue to grow at an impressive pace. It’ll be interesting to see how long it can grow like this.
The Afterpay share price is certainly highly valued. I don’t know what a fair price for the business is. You’d need a crystal ball to know how long Afterpay’s margins and market share stay as high as they are (or go higher).
It’s one of the most followed ASX growth shares out there. Time will tell whether it’s able to become a hugely profitable business, or whether it’s just growth for growth’s sake. There’s a lot of competition from players like Zip Co Ltd (ASX: Z1P).
