The Afterpay Ltd(ASX: APT)share price is plummeting amid coronavirus uncertainty and the general S&P/ASX 200 Index (ASX: XJO) downturn.
In this article, I will assess the main points from CEO Anthony Eisen's letter to shareholders.
Is the Afterpay share price drop due to general market uncertainty?
Afterpay CEO and Managing Director Anthony Eisen wrote that "we are unaware of any information, outside of the current uncertainty in the market generally, that would have precipitated recent share price performance."
This seems to suggest that Afterpay's share price drop cannot be attributed to anything specific to the company and its fundamentals.
In fact, it is considerations beyond those unique to Afterpay's fundamentals that are causing the drop in the Afterpay share price.
Indeed, Eisen stated that Afterpay's business model, balance sheet and customer base 'create a level of protection in times of economic uncertainty.'
However, I wonder – is Afterpay's management unaware of any information besides doomsday investor sentiment that would cause the share price plummet?
For example, PWC's March 2020 report on the possible economic consequences of COVID-19 pandemic estimated that 'over a year, a coronavirus pandemic could reduce Australia's GDP by $34.2 billion'.
Importantly for companies like Afterpay, PWC also estimated that 'Australia's household consumption will decline by A$37.9 billion over the forecast year.'
For the USA, the decline in America's household consumption is projected to be US$272 billion.
This is not uncertainty in the market generally, but a projected contraction in the economic activity essential for Afterpay.
Additionally, the ASX 200's consumer discretionary sector is currently down 8.3% and even the consumer staples sector is down 4.1%.
'No material impact on business activity to date'
It is important to acknowledge that Eisen stated that "we have not seen a material impact on our business activity and timing of installment repayments or transaction losses to date."
Risking charges of pedantry, how does one define material? 5% drop in sales? 10%? A 5% rise in bad debt?
Further, while there is no material impact, it is implied Afterpay is feeling some impact: at this stage, of the non-material kind.
This relates to the following point: Afterpay has not felt material effects on its business to date. However, to date, jobs are not being lost at a dangerous rate but many forecasts suggest this will not be for long.
For instance, in an interview with Bloomberg, Federal Reserve Bank of St. Louis President James Bullard predicted that the 'U.S. unemployment rate may hit 30% in the second quarter' due to coronavirus shutdowns.
Such high unemployment will lead to a drastic cut in discretionary spending and consumer consumption in general, factors highly material to Afterpay's business activity.
Afterpay's risk mitigation and preparedness
One reason Afterpay says it thinks it hasn't felt any material effects to its business is that "transaction values (average of around A$150) and average outstanding balances (average of around A$211) are low with no material concentration in our portfolio from a merchant or customer perspective."
Secondly, according to Eisen, Afterpay has "put in place the appropriate level of risk mitigation measures into our operating model that take into consideration the current economic environment and continue to monitor this on a daily basis."
Finally, Eisen reports that Afterpay's customer cohort has increased in age and spending power with its Australian customers "over-indexed in middle and high household income brackets and under-indexed in lower-income cohorts compared to the general population."
Wall Street Journal analyst ratings
1 month ago, 7 out of 12 Wall Street Journal analysts rated Afterpay shares a Buy, with 3 thinking it was a Hold and only one analyst deeming it a Sell.
Currently, no analyst thinks Afterpay's shares are worth a Sell rating, with 4 deeming them a Hold and 8 a Buy. However, it will be interesting to see the analyst rating mix after today's plummet.
Business operating update
Many questions will be answered in a business update following the end of the current March quarter. Importantly, the update will include information on how Afterpay performed over the three months ending 31 March 2020.
This information may very well decide whether the next 3-6 months see Afterpay's share price rebound or see it languishing in the bear market's pit.
