Global markets were mixed overnight with renewed concerns about the impact of the US-China trade war on corporate profits and the outlook for US interest rates with US Fed Chair Jerome Powell set to speak later this week.
Stock in Focus: Afterpay (APT:ASX)
Shares in Aussie Tech darling Afterpay have been volatile of late, following a press release from Visa highlighting the payments giant will begin testing its own payment instalments technology. Visa is scheduled to offer the service by January and said the new program would allow issuers to use an existing payment account, avoiding the need to submit a credit check or open another line of credit.
There are mixed views on how this affects Afterpay. Firstly, Visa does not issue credit or debit cards directly to consumers, instead, banks, credit unions and even retailers issue branded Visa cards to their customers. Afterpay’s success has been built on the value it drives to merchants from its millions of engaged customers. In return, merchants value Afterpay as a retail channel, paying 3-6% on each transaction with terms and conditions that prohibit the fee being passed on to the customer. With an average receivables duration of less than 30 days, this becomes a highly profitable business model, allowing Afterpay to keep the service free for consumers who pay on time. Afterpay has effectively flipped the traditional credit model on its head. This is a radically different way of building a credit business, requiring thousands of individual merchant contracts, and is unlikely something banks would individually seek to replicate.
Even so, Afterpay and a few other Aussie tech names are trading at very high valuations, and Afterpay seems like it is priced for success overseas (it has no doubt done a great job in Australia & NZ) – and we question how competitive international markets may become & what would happen to the business if customer credit deteriorated. In the tech space we have a preference for Xero, which has been one of our best performing stock picks to date.,
We currently do not have full research coverage on Afterpay.
Australia & New Zealand Market Movers
The Australian share market was in negative territory again yesterday (ASX 200 index -0.10%) as cautious investors awaited a strong indication from the Federal Reserve on how aggressively it would cut rates. In stock news, Coles shares gained as the company signed a deal with Microsoft allowing it to use artificial intelligence and other digital systems to overhaul its supply chain, product range, customer engagement and workforce.
The New Zealand market sold of on Tuesday (NZX 50 index -0.64%) joining a decline across Asia, as expectations of a smaller interest rate cut by the US Federal Reserve reduced the attraction of stocks held for a reliable income. Z Energy fell after the government announced proposals to encourage greater uptake of electric vehicles.
3 Things Markets Will be Watching this Week
- US Corporate earnings season kicks off this week.
- US Fed chairman Jerome Powell will testify before Congress on Wednesday and Thursday.
- In Australia, a business confidence survey on Tuesday will give its first report for a full month since the Coalition’s surprise Federal election victory.
Have a Great Day,