Is Afterpay profitable? While releasing its first financial results after Block, a U.S. group, acquired it, Afterpay announced a $345.5 million net loss for the period of six months ending on December 31st, 2021. This was a massive increase from the $79.2 million recorded in the previous half.
Afterpay’s pre-tax loss also hit $501.9 million, an increase from $76.2 million the previous year. These losses were attributed to a rise in operating expenses on receivables’ impairment expenses, also called bad debts, from $72.1 million the previous year to $176.8 million. High marketing costs, the loss of the company’s Clearpay business in the UK, and the closing down of one of its convertible notes also contributed to the rise of the half-year losses. Amid these losses,
Afterpay’s overall income rose significantly in half, from $417 million the previous year to $645 million, a 50% increase. Recent reports suggest that the company’s bad debts are now under control, and the situation won’t change, despite the challenging economic times that businesses in the industry are facing globally.
In 2022, Afterpay was responsible for Block’s $811 revenue and $588 million gross profit. Afterpay is a FinTech company that collaborates with some of the largest online retailers to offer online shoppers BNPL (buy now, pay later) solutions.
Timeline of Afterpay Financial Growth and Funding
2014-2017: Antony Eisen and Nick Molnar founded Afterpay in 2014. The company started as a financial payment agent for shopping. In January 2015, Afterpay entered into a joint venture with Touchcorp, a digital payments system organization, to facilitate its payment processing. A month later, Afterpay acquired Princess Polly, a financial group, as its inaugural retail customer.
Many of Princess Polly’s customers were young and didn’t own credit cards. They began using Afterpay once it was integrated into the website. In June of the same year, Afterpay raised $8 million with the help of Hugh Robertson, a stockbroker. In May 2016, Afterpay was at $1 at midday and concluded the day at $1.25. During the first half of the 2016 financial year,
Afterpay made a net loss of $1.25 million after tax. In February 2017, the company agreed to form a 60/40 merger. The deal was approximately $500 million. Under the agreement, NewCo, a newly listed entity, acquired the two companies.
About 64% of Afterpay shareholders and 36% of Touchcorp investors would own the new entity. In May of the same year, Afterpay processed 15% of all fashion retail transactions online. The Touchcorp merger will be completed in June 2017.
In November of the same year, Street Tals announced that the Australian Securities and Investments Commission (ASIC) was planning a comprehensive probe into the consumer finance industry, including BNPL companies like Afterpay. Reliable sources opined that the regulator wanted to establish how these companies generated money, their credit approval procedures, and their customer disclosure level.
2018-2021: Matrix purchased $18.75 million Afterpay shares at $6.51 each, with Dana Stalder, one of its general partners, joining the Afterpay board. Matrix would later assist Afterpay in expanding to the U.S. for 10% of the company’s U.S. subsidiary’s future growth exceeding $50 million.
In April 2018, Ownership Matters, a governance entity, released a report showing how minors could utilize the payments to purchase up to $300 worth of alcohol, sighting an account registered under Mickey Mouse that purchased $250 worth of wine. These reports forced Afterpay to revise its processes. In May 2018, Molnar and Eisen sold $13.3 million worth of shares before joining the S&P/ASX 200 Index in June of the same year. In November 2018,
Afterpay got a significant boost after Kim Kardashian endorsed the company on her social media platforms. In February 2019, Afterpay ducked a requirement to execute costly credit evaluation before signing customers following the Senate committee’s decision that BNPL companies weren’t credit providers. The committee recommended that the government consider an appropriate regulatory framework for the industry.
Eisen and Molnar first appeared on the Financial Review Rich List in May 2019, each with an estimated $487 million in wealth. Molnar became the youngest billionaire to appear on the list. In June of the same year, the Australian Transaction Reports and Analysis Center (AUSTRAC) served Afterpay with an external notice stating that it had “reasonable grounds to suspect that Afterpay is a reporting entity that has contravened and/or is contravening sections 32 and 81 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006”.
The notice came a day after the company penetrated the market for $317.2 million worth of fresh capital, with its directors Molnar, Eisen, and David Hancock cashing out $103 million. A prominent economist, Larry Summers, joined the Afterpay advisory board in October 2019, mentioning that the company’s rapid growth rates and its commitment to curbing credit card addiction in the U.S. convinced him to become part of its journey.
Afterpay’s monthly sales in November 2019 were more than $1 billion. This was the company’s highest monthly performance since it was founded. In February 2020, the number of Afterpay customers in the U.S. was 3.6 million. The company would attract a million new users by November of the same year. Safe to say that nearly 5% of all millennials in the United States have used Afterpay.
The company reported its intention to introduce in-store payments later in the year. In March 2020 and at the peak of the COVID-19 pandemic, Afterpay’s shares suffered a major blow, falling by 28.5% to $8.90. In May 2020, Tencent, a Chinese technology powerhouse, paid $300 million to acquire a 5% equity share at Afterpay. Both companies termed the move a strategic partnership.
Eisen and Molnar approximately $127 million worth of stock each in an exercise to raise $800 million capital to facilitate its global expansion. They decided to sell 2.05 million shares, approximately 10% of their company holdings. Following the sale, Molnar became the youngest billionaire in Australia at 30 years old. In August 2020, Afterpay’s shares suffered another blow after PayPal launched its Pay in 4 installment offerings.
In October 2020, Afterpay partnered with Westpac, which saw Afterpay’s shares increase to $100 for the first time. Westpac enabled Afterpay to offer savings and transaction accounts through its newly launched 10X technology platform. In February 2021, Afterpay’s share price peaked at a $158.46 record high on a $45 billion valuation at the S&P/ASX 200. The company also raised a $1.5 billion convertible bond the same month to obtain U.S. business. The company’s shares experienced a trading standstill, with its brokers launching a $1.5 billion trade.
Plans were also underway to acquire Matrix and integrate its U.S. subsidiary within the group. Proprietors of the company were also planning to introduce the Afterpay Money app to compete with the big banks. Customers would use the app to receive their salaries directly. It would also allow various other payments. Molnar and Eisen later sold shares worth $103.52 million.
In April of the same year, Afterpay allowed its employees in the U.S. to change their stock in the ASX-listed parent into shares. According to financial experts, 3.2 million shares, worth $426 million, went to 30 staff working in the company’s San Francisco office. In July 2021, Afterpay announced a partnership between Goldman Sachs and Apple, allowing installment repayments. This came hours after PayPal activated its Pay in 4 installment system for nine million customers in Australia.
Later the same year, Square, which later changed its name to Block, announced plans to acquire Afterpay in a $39 billion deal, the largest in the history of an Australian takeover. Founded by Jim McKelvey and Jack Dorsey in 2009, Block is an American FinTech company specializing in mobile payment solutions.
Afterpay Financial Performance: Revenues, Expenses, and Profits
Block, a U.S. firm, now owns Afterpay. The firm recently announced a massive $501.9 pre-tax loss attributed to the failure of its instant-loan clients to settle their debts. The company’s bad debts rose to $176.8 million from $72.1 million in the final half of 2021. Afterpay’s net loss was $345.5 million, an increase from $79.2 million for the last half of 2020.
From these results, many experts think Block’s decision to acquire Afterpay for $39 was a big miscalculation. Afterpay’s late payment charges, a core metric of what portion of its advances is getting repaid promptly, rose by 124% to hit $79 million in the yearly half ending December 2021.
Afterpay’s overall income for the year ending December 2021 was $924.7 million, while the net margin was $434.1 million. In the 2021 financial year, the company’s earnings before interest, taxes, depreciation, and amortization (EBITDA) was about $130 million, a 37% rise over the EBITDA the previous year. The company’s estimated annual revenue is $277.7 million, with an estimated $182,000 in revenue per employee.
Afterpay’s employment expenses rose to $186.1 million in the 2020 financial year from $51.4 million the previous year. Operating expenses, including marketing costs, rose to $146.3 million in the same financial year from $73.2 million in the 2019 financial year, marking 1.3% of underlying sales. The company’s marketing investment in the second half of the 2020 financial year was higher than in the first half.
Afterpay is almost breaking even. After its last deficit in late 2021, the company registered a $43 million profit the following year. Proprietors of the company believe it will break even in less than a year.
To accomplish this goal, Afterpay must achieve a 65.2% year-on-year growth, which is relatively high. However, failure to achieve this growth rate means the company will wait longer to achieve stable profitability. It is worth mentioning that a company can achieve a high growth rate, especially amidst an investment phase.
Still, Afterpay has done a tremendous job regarding capital management, with debt representing 6.8% of equity. This shows that Afterpay has financed a large percentage of its activities through equity capital; its minimal debt requirement reduces the risk of investing in a struggling firm.
Potential for Profitability
Afterpay needs to adopt robust and strategic measures to enhance its profitability potential. For instance, it should focus on market divisions where purchase financing is as high as the loan size (it should be higher than $2,500). Default rates should be low. Retail eCommerce divisions with less than $500 in average loans and high competition may not be ideal for Afterpay and other BNPL companies.
Afterpay can also develop customer micro-segments and establish ways to price each segment according to risk profiles. Leveraging customer data to identify pricing arbitrage opportunities can boost the company’s loan portfolio. Offering high approval rates can play a significant role in increasing Afterpay’s profitability.
The company can enhance underwriting by utilizing alternative data like rent and utility payments, mobile phone usage, bank account cash flow, and behavioral data. It can also rely on traits from credit bureau data. In some market divisions like the elective healthcare and dental segment, Afterpay’s proprietors may want to offer between 75% and 85% approval rates to be a viable and successful player.
The company should also focus on providing different types of installment lending products. Offering a single BNPL product is not a viable strategy. The company can consider flexible yet interest-generating long and short-term loans, no interest, no down, and same-as-cash products. Each product has a different profitability potential. Offering customers a range of products can help Afterpay increase its profitability. Incorporating other banking products like investment and wealth generation tools, credit cards, and crypto can help the company achieve high profitability.
Before cross-selling these products to its customers, Afterpay must first identify the desire and present its customers with a pre-selected offer through data collected via the customer’s usage habits. Afterpay must develop a comprehensive manual of different products to generate more money and improve profitability.
While we agree that Afterpay is a successful company, it has made massive losses in the past, affecting its performance to date. While some studies suggest the company is almost breaking even, it only made a small fraction of its profit in the financial year that ended in December 2022. However, there is room for improvement, and the company’s proprietors must adopt a raft of measures to boost its revenue generation and cut down on expenses. Only then will Afterpay start recovering, eventually making high profits.