Bonus: Andrew Brown on Afterpay (ASX: APT)

Andrew: [00:00:58] Hi, how are you? [00:00:59][0.7]

Alec: [00:01:00] Hi, Andrew, I'm good, how are you? [00:01:01][1.4]

Andrew: [00:01:02] Oh, very well, thanks. [00:01:02][0.7]

Alec: [00:01:03] Excellent. That's good. That's good. I think Bryce sent you a text that we were going to call. [00:01:06][3.3]

Andrew: [00:01:07] He he did. Absolutely. Yeah. And so I didn't reply to it for [00:01:10][3.3]

Alec: [00:01:10] a little while. You're you're right. How are you. [00:01:12][2.0]

Andrew: [00:01:13] Oh, good. Bryce yourself. [00:01:14][0.8]

Bryce: [00:01:14] Very well. Very well. [00:01:15][1.0]

Andrew: [00:01:16] Excellent. Good stuff. [00:01:17][1.0]

Bryce: [00:01:17] We thought we'd just give you a quick buzz to cover off a couple of things. You know, we love chatting to you and having you as our sort of promoter of sanity. And obviously there's a lot of interest in the community at the moment, around Afterpay. Sure. And you've obviously got some opinions on on the stock as well. And for a lot of our listeners, they would have received an email during the week around the share purchase plan that is available to Afterpay shareholders. For some of our listeners, it's the first time they would have received an offer like this. And Espe. So just wanted to get your thoughts on, you know, what you think about the ESP [00:01:56][38.8]

Alec: [00:01:57] and maybe also Afterpay the last couple of months so [00:02:00][2.9]

Bryce: [00:02:01] that after the last couple of months. [00:02:02][1.4]

Andrew: [00:02:04] Absolutely. Yeah, no problem. I'll, I'll explain how the pay works as well because it's quite important. [00:02:09][4.8]

Bryce: [00:02:10] Yeah, absolutely. [00:02:10][0.2]

Andrew: [00:02:11] And particularly if they're not very familiar with these things so. [00:02:14][3.6]

Bryce: [00:02:15] Well let's start with that then perhaps. What does it actually mean if you get one of these emails. Okay. [00:02:19][4.3]

Andrew: [00:02:20] The rules in Australia now are that you if you're a shareholder in a company and they offer a share purchase plan, you can subscribe for up to 20000 dollars worth of new shares. You don't have to do all 20000 Dollars. And in the case of the Afterpay share purchase plan, the pricing is either a maximum of 66 Dollars or it is the volume weighted average price, which basically means that it's not the average price, it's volume weighted. So obviously there's a big difference between the million shares changing hands at 60 or dollars and one share. And it's the volume weighted average price in the week ending Thursday, the 30th of July, which is also when the share purchase plan closes. So effectively, what that means is you should probably wait until closer to the 30th of July and you should also make sure you have funds on hand so that you can pay using BPI because you'll say there's BPI coding on your application form if you you know, if you want to take it up. And that's going to give you a chance to see whether you're going to get shares at 65, Dollars 64, if the shares obviously fall away in that week, ending first lady 30th of July and where they're at that slightly lower price than is currently prevailing, you know, you find it more attractive, as I'm speaking to the stock's sixty six point fifty six cents. So it's it's quite close to that maximum price. So there you go. That's how it's done. And it's usually it's usually increments of 1000 or 2000 Dollars. You don't have to take up the whole 20000. It's basically a way of giving retail investors the same opportunity that the institutional investors got in Afterpay when they took a placement at sixty six dollars a share, what, about ten days ago. [00:04:12][112.5]

Bryce: [00:04:13] And so it's been trading up in sort of the seventies. Do you often find that when these offers come out and the purchase price is or the offer price is lower than current trading, it kind of reverts back down to that price? [00:04:25][12.4]

Andrew: [00:04:26] It tends to. I mean, the fact that they tried in the 70s is a bit silly because, I mean, they're issuing effectively there's a billion dollars worth of stock, either what's called primary stock, which the company issued, or, of course, the sell down firm from the two founders. So, you know, the shares should have hung around the sixty six mark for a while. But, you know, to be blunt, there is a period of, I think, total insanity where not just Afterpay, but the other, you know, five or so buy now pay like two stocks will go beat up quite aggressively, which partly coincided with the Victorian lockdown down again. So they should you know, these things should trade around sixty six dollars or thereabouts in the absence of new news or information. And that's only in the short term, I should stress. I don't believe the shares were at any way remotely. [00:05:13][47.4]

Bryce: [00:05:14] This is the next question. [00:05:16][1.7]

Andrew: [00:05:17] And as as a as a course of good, good governance and disclosure, I have a short position in Afterpay as we speak. [00:05:24][6.9]

Bryce: [00:05:24] Interesting. OK, so the next question, and I think you have seen it on Instagram, we've started a hypothetical portfolio back in 2017, bought Afterpay at two point fifty five, and then shut our eyes and dusted the dusted off the passwords to the portfolio just recently and saw that we'd made a very juicy 2700 per cent return. Now we're looking to sort of re-engage with the portfolio a bit and make it a bit more realistic with what's going on at the moment. A lot of the. The ants are calling for us to sell that position and start from scratch, what would be your thoughts around that? [00:06:02][37.2]

Andrew: [00:06:02] OK, just just first of all, I brought a couple of pieces, and I think we mentioned this in the last time I had a long chat with you guys that was called Coffee Can Investing, which is in essence what you did, which is, you know, you just put your portfolio under the bed, left it alone. And one of the things about that is that, you know, you sometimes get a little lucky and a stock what's called multi bags. And that's certainly the case with your Afterpay position. So the people have criticised you. The all the returns come from Afterpay need to go back and have a look at this solid investing, because that is what happens. Should you start to re-engage with the portfolio, Salli Afterpay and at everything else? My advice to you would be yes to do that. [00:06:46][43.6]

Alec: [00:06:46] Okay. It would be surprising if you told us to hold off when you have a short position in the [00:06:51][4.6]

Bryce: [00:06:51] stock, right? Yeah. Why is that? [00:06:54][3.1]

Andrew: [00:06:54] Why is that? Let's just get one thing straight. Some people think when folks like me say we think Afterpay is really overvalued and everything else, that we don't actually like the company or like what the company does. You must separate out the fact the management of Ren Afterpay extremely well. They've grown extremely well. They can't be critiqued really in any particular way for that. They had the idea and they've pushed it very hard and they've managed the growth in the company really pretty well to date the case. So it's no criticism of the company. It's no criticism of what the company does. And OK, the critique is of the valuation that the company shares currently trading at. So let's get that absolutely clear. There are other cases where we have short positions where it is a critique of the company's management and, you know, they might even be fraud in some cases and things like that. That's obviously not me. Can I see Afterpay? It's got a market value about eighteen and a half billion dollars at the moment. OK, let's just say the people, as it matures, a little more analysis and strong growth phase, it might try to twenty times earnings kind of. Please bear in mind virtually every other stock in the financial sector at the moment, and they are quite depressed for good reason. Trades on a single digit price earnings ratio. I know it was on below ten, so eighteen and a half billion at twenty times earnings. And if you put a full tax rate at 30 percent on it, this company would need to justify that would need to earn about one point three dollars billion pre-tax. OK, now we know the company's got a fixed cost base, which is actually going up because they are spending a ton of money on marketing and they're going to have to keep spending a lot of money on marketing because there's a lot of other players in the sector and they've got to try and obviously spread the word about what Afterpay is. So the marketing spend is not going to come down. So they fixed cost base of people in marketing and everything else is probably going to move up close to sort of 350 million bucks in the next few years. So by the time you add that on, they need to make margin out of the business of buying our highlighter, probably over about one point six dollars billion to actually justify the current share price at twenty times earnings multiple when you work backwards. And I don't use these metrics, but I know the market does, they talk about a two percent net transaction margin, then that would imply basically sales of about Dollars billion. Wow. And and you need to, don't forget, impute an interest charge as well to add onto that. Now, why is that? I mean, the company's got to finance itself. That's why they've had this big rising, because the banks won't realistically finance them. And you can't cut this very short term financing where people roll this stuff over and six weeks into securitised vehicles very easily. So the company's going to have to sort of fund the growth in sales through equity. So it's going to be a continuing issue of new equity, which is fair enough. But you consider at the moment there at 11 billion of sales, they've had a public target in the low 20s by the end of twenty twenty two. So two years they may well exceed that. But like the current market value of the company really saying that, you know, they're on another planet, beyond that, I think that would imply I mean, give you an idea of the current right of spend of the customers, which is about fifteen to sixteen hundred bucks. That would imply they'd have somewhere over fifty million customers. So the issue with Afterpay is really pretty simple, that the current market price of it and to be fair, the same for all the other buying our pilot stocks implies a level of performance by the company that is multiple be on multiple of what they're currently doing. Whereas what you'd rather do if you're an investor in Afterpay is to say, hey, yeah, we think the company's going really well. We like the model. We. The management was sort of prepared to pay for maybe the next year and a worth of progress because it's a fast growth company or maybe a little bit beyond that. But what you're doing is I mean, you're sort of you know, you're paying far, far, far into the future. That's the problem that's come about from the fairly hefty stock price rise that's taken place over the last few months and in the company. [00:11:22][267.3]

Bryce: [00:11:23] Yeah, and it's great analysis. [00:11:24][1.1]

Alec: [00:11:24] That analysis makes a lot of sense and it's very clear sighted. I guess the question becomes then, how do you think about the. Well, at one stage it was 700 percent price increase in two months that Afterpay saw since the depths of Covid. [00:11:38][14.1]

Andrew: [00:11:39] Yeah, look, I Dollars I think he got down to in March at its worst. I had a short position going into the Covid thing in Afterpay and obviously Zarit closed it out very advantageous, like I Dollars given where I've got to was probably too cheap. And it's just, you know, and so, you know, great opportunity for people to pick it up. Then if they were brave enough to sort of, you know, go into the state of the ghile, the issue now is by appreciating eightfold effectively since that period of time. That's just insane. That's not so. It was it was, you know, like Dollars. It was too cheap. I didn't buy it. I probably should have done. But, you know, an eight fold increase in a matter of four months is just not Bryce. It makes it it makes no sense at all. And it tells you this sort of market environment we're in at the moment, you know, the sort of thing that's sent up Tesla's 60 odd percent at one stage in a matter of nine to ten days because it was it's maybe going to be included in the S&P 500 index, not because it's selling eight more cows than people might have thought. OK, so is there's a lot of companies going out where there is no fundamental justification for two things, either by the current pricing of their equity or by the increase in the price of their equity from the recent past, even in some cases, if they've started out a little bit cheaply. And part of that is obviously accounted for by retail investors with low commissions who've done very well in the last three months. They've been flying in future companies, if I can put it that way. And, you know, I think this guy is really easy and they have very little regard to the underlying valuations of the company. So, you know, what kind of assumptions are biting to the share across the company? It's the one thing I think I've said she goes for, obviously in some in some of the podcasts we've done, all of you can assess the business of a company and actually say, hey, I think this is a really good business and you can rationalise why and we can have a good debate about whether Afterpay is a good or a not so good business and does it have a moat and all that sort of stuff? I'm probably not as optimistic as some other people would be, but I'm not a pessimist either. That's one side of it that the other side of it is what's it worth? Yeah, and that's where these type of investors really struggle. I just saw Afterpay as a great company. It's going up one of the biggest issues and a lot of this has been brought out in recent times is if you bought even some great companies like Cisco at the peak of the dot com boom in 2000, it's 20 years later. I guess what you still get your money back, you pay too much. And there's a ton of studies, guys, which show you that the longer the period of time you go, and particularly once you get out of periods of time, you be on seven or eight years to ten years. If you hold these stocks for the long term and if you're paying this price for Afterpay, you've got to the simple, most determining factor on whether you do well as an investor is the price you paid. Yeah, absolutely. I mean, obviously the is going to do target the price you paid is the most important factor. So you must separate those two decisions out and it's sixty six dollars. Well, you, you know, you won't find Afterpay in my portfolio in the short. [00:15:03][204.7]

Bryce: [00:15:05] Well, Andrew, we're going to have to leave it there, but really appreciate your comments and we will certainly take on your advice when it comes to what we do with our hypothetical portfolio. Maybe we'll take the contrarian approach and keep it in there. Who knows? [00:15:16][10.8]

Andrew: [00:15:18] But certainly one thing today, you could certainly reduce the. [00:15:21][3.3]

Bryce: [00:15:22] Yes, yeah, yeah, yeah. I think that's a minimum approach, let's put it that way. But look, I absolutely appreciate your time, as always. And perhaps we should get you back in the studio for a much more detailed conversation about what's going on. Because, you know, even when since we last spoke and things are changing pretty quickly, so a lot has happened here. So, as always, look at audience love listening to what you say. So let's try and make a talk to get you back on, [00:15:49][27.7]

Andrew: [00:15:50] although I appreciate it, [00:15:51][0.8]

Bryce: [00:15:51] guys. Nice. Thanks, Andrew. [00:15:52][1.2]

Alec: [00:15:52] Thanks, Andrew. [00:15:53][0.2]

Speaker 4: [00:15:53] Thanks for listening to Equity Mates investing podcast. Of Equity Mates media, please remember that everything you hear in Equity Mates investment podcast is general advice, only the content has been prepared without knowing the personal objectives, specific financial circumstances or goals. The host of Equity Mates investment podcast may maintain positions in the companies discussed before considering any investment. Please read the product disclosure statement and consider speaking to a licenced financial professional. [00:15:53][0.0]

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