In the United States, the average credit card interest rate paid by interest-bearing accounts is 14.87%. This means, on average, each active account makes $213 for credit card companies per year. Afterpay’s average revenue per user was $80.93 in the first half of 2018.

67% of US millennials (aged 18–29) do not own a credit card. Source.

This means that Afterpay is able to effectively kill two birds with one stone in creating a product that doesn’t have the stigma of credit that is still present after the GFC, but also allow consumers to timely displace their payments into the future like credit.

This is a huge incentive for businesses to integrate Afterpay into their business.

And, they have only just started scratching the surface.

Afterpay is at a $2 billion underlying merchant sales run rate. Less than 0.6% of their total addressable market. Source.

Experian’s State of Credit Report 2017 indicates the average US consumer was indicated to hold 3.1 credit cards with an average balance of $6,354,

while also holding 2.5 retail credit cards with an additional $1,841 in balances.

A key difference worth noting between Afterpay and credit cards is usage frequency. The average user use’s Afterpay 0.8 times per month vs. credit cards at 14 times per month.

While this is increasing, it is unlikely to reach the same level of credit cards in the future.

Wall street/Silicon Valley Arbitrage

Technology products have the ability to scale rapidly and exponentially. One line of code can touch millions. Tech startup growth tends to accelerate as it scales, not slow. Margins increase with scale, not stabilise.

This is why there is such high-return to be made as a VC or technology investor.

Wall street still doesn’t understand Silicon Valley.

They don’t understand the Network Effect.

The network effect is the effect of an additional user of a good or service has on the value of that product to others.

This causes technology competition to skew valuations exponentially, with a “winner takes all” outcome. A great example are ride-sharing companies valuations.

Afterpay has a growing network effect, as more retailers come on board, the value of the product only increases for it’s users — and then increases in value for retailers as more users use the product. This continues in a cyclical fashion as the product only becomes more valuable for users.

Afterpay currently has a 7% penetration of the Australian population. If we assumed a similar 7% penetration in the US, APT would have 15 million users.

However, it’s easy to see a world in which Afterpay is completely successful and manages to dominate just the Australian consumer market, and achieved greater than 33% saturation, users would be 8.67 million.

To put this into perspective if we were to do an off the envelope valuation for Afterpay at 8.67 million users it would be over $5.8 billion. ($674.44 LTV * 8.67 Users = $5,847).

That’s just in Australia.

The United States, a 10x bigger market, could easily see greater than 4% penetration by mid 2022 (assuming the same growth rate as in Australia). In our opinion this is conservative as the millennial market in the U.S. has a population of 63 million compared with Australia of 6 million.

An off the envelope valuation for Afterpay at 14 million users in the US would be over $9.4 Billion (assuming a similar LTV to Australia).

Looking at combined numbers, with a net transaction margin of 2.3% (H1FY18), this represents a $573m EBITDA contribution.

Facebook currently trades at ~30 Price to Earnings ratio.

PayPal currently trades at ~50 P/E ratio.

Netflix currently trades at ~153 P/E ratio.

Afterpay’s future looks exciting.

Competitors

No business is without competition and Afterpay has strong competition. These competitors all have similar or identical products to Afterpay…

Klarna

FuturePay

Affirm

PayPal Credit

Quadpay

Sezzle

ZipPay (Australia)

Yet, they don’t have the same network effect. Afterpay has achieved escape velocity.

“Achieve escape velocity. Grow so quickly it discourages anybody from even trying to compete.” — Peter Thiel

Searches for “Afterpay” by State in the US. Source.

Risks

Amazon or Paypal launch internal product. Amazon now has 49% of the e commerce market in the US — they could easily launch as similar product and kill Afterpays margins and growth. PayPal has 237 million users globally and could do something similar. This also represents a M&A opportunity as Afterpay Touch is a vertically integrated payment and credit company.

Amazon now has 49% of the e commerce market in the US — they could easily launch as similar product and kill Afterpays margins and growth. PayPal has 237 million users globally and could do something similar. This also represents a M&A opportunity as Afterpay Touch is a vertically integrated payment and credit company. The US market has a inherently higher credit risk. This is due to a more diverse population and lower minimum wage. Thus, Afterpay will have a higher net transaction loss rate in the US market.

This is due to a more diverse population and lower minimum wage. Thus, Afterpay will have a higher net transaction loss rate in the US market. Stricter Regulation. Afterpay’s product becomes regulated and subject to credit rules. This could impact overall profitability and effectiveness.

Afterpay’s product becomes regulated and subject to credit rules. This could impact overall profitability and effectiveness. Competition thins margins. Over-competition could thin margins to unprofitable levels. The network effect that Afterpay has experienced in Australia so far might not transfer to the US.

Over-competition could thin margins to unprofitable levels. The network effect that Afterpay has experienced in Australia so far might not transfer to the US. Slow US growth. The current valuation of Afterpay has priced in significant and rapid growth in the US market. If US growth does not follow a similar trajectory to Australia, Afterpay’s current valuation will be unjustified.

The current valuation of Afterpay has priced in significant and rapid growth in the US market. If US growth does not follow a similar trajectory to Australia, Afterpay’s current valuation will be unjustified. Capital Requirements. Afterpay is currently reliant on NAB’s A$350m receivables facility to fund Australian sales. They need to find new banking partners to expand their debt facility globally and reduce points of failure.

Team

Founder led companies outperform the rest. Founders, Nick Molnar (CEO) and Anthony Eisen (Executive Chairman) still lead Afterpay since launching it in mid-2015. Both still own substantial chunks of the company.

Afterpay has 273 employees listed on LinkedIn, with 26 based in the US (up from 19 two months ago).

The Afterpay team has demonstrated that they can successfully undertake a merger with Touch corporation to become a vertically integrated payments company, while continuing to rapidly expand.

The team has shown execution time and time again in Australia and will likely show it again in the United States.