Should you invest in Afterpay’s share purchase plan?

Afterpay has announced a $150 million share purchase plan – here's what you need to know.

What a roller-coaster the last few months have been for Afterpay (APT) shareholders.

After its share price plunged to $9 in March before rallying to $60 in the 3 months following, the tech star of the ASX is now launching a $150 million share purchase plan (SPP).

If you're a shareholder of Afterpay, it means you could be eligible to buy up to $20,000 of APT shares at a discount.

It comes after Tuesday's successful $650 million capital raise to institutional investors at a placement price of $66 per share, despite an initial price floor of $61.75.

At $66, the placement was a 2.9% discount to APT's last closing price before Tuesday's trading halt – but equal to Wednesday's closing price.

Also causing a minor stir, the company's co-founders Anthony Eisen and Nicholas Molnar announced they were selling 2 million shares each at $66 – around 10% of their holdings in the company.

Share purchase plan details

The company says it's intending to use the additional capital to continue its expansion overseas and to act on potential merger and acquisition opportunities.

Under the share purchase plan, APT stocks are being offered at the rate of $66 or the average closing share price in the 5 days leading up to the SPP close date on July 30.

To be eligible to participate, you must be an Australian or New Zealand citizen and a registered APT shareholder as of 7pm on July 6.

Investors can buy up to $20,000 of new shares and no less than $1,000 under the plan.

Further details of the SPP are still to be released, but in most cases, shareholders will be given several weeks to decide before the offer closes.

Typically, the process is to apply for shares directly through the company, rather than your broker.

Is the Afterpay SPP a buy?

Afterpay's share price has seen an exceptional recovery since March this year.

Between late February and late March, it fell as much as 75% from a high of around $40 to as low as $9 in less than 4 weeks.

What followed was perhaps even more astonishing. As the ASX started recovering, from March to July, APT rose by more than 600%, reaching a new record high of $70.

At a potential SPP buying price of $66, the question now for shareholders is whether its price has further to rally.

The major brokers remain divided. As of Wednesday, Macquarie set a future price target of $70, Morgans at $68.58, Morgan Stanley at $36 and UBS at $27.

Update: On July 9 Morgan Stanley upgraded its target price from $36 to $101.

Among the bullish comments, brokers pointed to Afterpay's record-breaking June quarter, which saw sales jumping by 127% from the previous quarter.

But according to CMC Markets analyst Michael McCarthy, while Afterpay's mid- to short-term outlook is strong, there are reasons to be wary.

"At these levels, I'm certainly not a buyer," McCarthy told Finder.

He pointed to the fintech's unusually high loss rate by customers that haven't repaid their debt in the first half of 2020.

"These are unusual times, being in the midst of a pandemic, so it might just be an aberration. But it's something to be aware of," he said.

McCarthy also noted that the current price, expectations from investors are for enormous growth, despite having not yet turned a profit.

"There's a leap of faith in buying this stock that their growth model will be proven and they'll retain the 'first mover advantage' that they have," said McCarthy.

BNPL competition

While Afterpay saw early success in the buy now pay later (BNPL) sector, competition in Australia and around the world has been steadily growing.

"Investors that are stepping up now are not only counting on [Afterpay] to continue to successfully roll out their growth strategy around the globe, but are also assuming that the competitors won't catch up," said McCarthy. "I think in the longer term, it is inevitable."

Other ASX-listed BNPL players Zip Co, flexigroup, Openpay, Splitit, Sezzle, QuickFee and MoneyMe have all similarly rallied in recent weeks.

Despite this, managing director of Medallion Financial Group Michael Wayne believes Afterpay is in a strong position.

"Our belief is that scale is key in the 'buy now pay later' space, and for that reason, if we had to choose, APT would be our preference," said Wayne.

"There is no doubt both [Afterpay and Zip] are valued at multiples that are hard to justify based on traditional valuation metrics. In many ways, current prices have presumed success embedded in the price. Only time will tell whether or not these businesses can avoid customer attrition and bad debts, and achieve enough scale to justify these valuations."

How to invest in Afterpay

If you're not already an Afterpay shareholder, you won't be able to participate in the share purchase plan.

However, you can buy regular shares in Afterpay by opening a brokerage account.

To buy shares online, you'll need to sign up with a share trading platform and must be over 18 years of age.

Once you've joined, you'll need to top up your account and search for the stock using the company name or stock code "APT".

Depending on the broker you choose, you'll be able to buy the stock using a market order (buy at the current price) or a limit order.

To compare brokers, head to our share trading homepage.