Hacker News Reader

Comment by hn_throwaway_99 | Hacker News Reader

I've just come to accept that I'll never understand corporate finance. Based on the data I could find, this works out to a sales price of about 76 times revenue for Afterpay. Even for a fast growing company, how can they ever grow into that valuation? Of course, it's an all stock deal, so perhaps it's better to just consider what percentage of Square they're giving to Afterpay stockholders, but I still just can't wrap my head around these prices given the revenue numbers.

View on HN

The acquisition is entirely in stock, so very little actual cash is changing hands.

According to the Afterpay investor relations site, Afterpay's gross revenue for FY21 (ended June 30, 2021), assuming constant currency exchanges rates, was $978 million AUD [0]. If you subtract out the first half of FY21's revenue ($385.2 million AUD) [1], we arrive at an implied revenue of $592.8 million AUD for the second half of FY21. Convert that to USD (USD$1 = AUD$1.36) and we arrive at an annualized revenue run rate of ~$871 million USD.

Which implies an acquisition price of ~33.3x gross revenue. Which is certainly a lot better than 76x ratio. Moreover, that growth rate is ~53.9% ($592.8 million / $385.2 million) over the prior half-year which is truly astounding growth.

[0]: On https://corporate.afterpay.com/investors/asx-announcements, go to 'ASX Announcements', then find the 'FY21 trading update' dated 2 Aug 2021, $978 million is on the second data column of the second table on the first page.

[1]: On https://corporate.afterpay.com/investors/asx-announcements, go to 'ASX Announcements', then find the 'H1 FY21 Results Announcement' dated 25 Feb 2021, $385.2 million is on the fourth data row of the first page's table.

The profit margin per "Revenue" dollar is so small for a payment processor it always seemed like a strange metric to value a payments company on for me, as they are essentially just a middle man for this "Revenue" taking it from the customer and giving it to the merchant. Afterpay does typically have higher merchant fees than a regular CC gateway tho

Afterpay aren't really a payments processor in the typical sense though, their business model is nothing short of genius tbh. They've set up a non-traditional 2-sided market connecting consumers + merchants, allow consumers to pay the MERCHANTS back over 4 installments and collect a 5% fee on the way through as well as any late fees (remember they're not taking on the risk here either)

Afterpay bears the credit risk, not the merchants. Search for the keyword "net transaction loss": https://afterpay-corporate.yourcreative.com.au/wp-content/up...

This feels similar to the United States credit card market where there’s a 3% fee paid for by the merchant and thus a lot of opportunities to “reward” customers, and an incentive to keep things status quo.

They take like 5% of the money. That's pretty dang significant.

Other potential reasons for high multiple:

- Acquirer sees huge growth and thus a reasonable PEG ratio

- Acquirer wants some key market they have been unable to win themselves

- Acquirer wants some key technology, patent, or engineering know-how

- Acquirer wants team that has achieved something impressive to apply to acquiring company's own product

- Acquirer wants to absorb client base with higher growth than they have internally

- Acquirer has M&A execs who cant get promoted without deals

- Acquirer has inflated stock, so the cost is only relative to this inflated stock while the stock remains inflated

Acquisitions are priced on speculated future potential after acquisition, and thinking about the potential cost of acquisition by someone else, not revenue today.

We're in a gigantic bubble

There have been tens of trillions of dollars and other currencies created from thin air the last year and a half. And more is being created currently. This isn’t just the US government. It’s basically all governments in the world.

EDIT:

Fed has been purchasing 120b of assets per month https://cheddar.com/media/federal-reserve-to-keep-up-asset-p...

Federal government has spent at least 3.5 trillion on COVID-19.

EDIT2: More like 8.6 trillion. 2 trillion added by the bills passed early 2021.

https://datalab.usaspending.gov/federal-covid-funding/

That is the US. Then add all the other countries in the world.

That much extra money chasing the same amount of the goods and services, investments, etc…

So either we are in a bubble or currency has been devalued.

EDIT3: Fed spending is about 25k per person in the US.

I said that the other day and someone just replied snarkly "Trickle up economics".

That's like saying Thermodynamics is trickle up Chemistry. There is value in looking at macro-ecomonic concepts especially when it comes to government spending, federal reserve interest rates and inflation.

One of the weird things about trickle down economics is that the rich's favorite past time is earning more than they spend. Basically the entire thing is built around the idea that dumping money into a portion of the economy that doesn't have to pay taxes is good while ignoring that this money was created through debt which eventually is converted to government debt through various means. When the debt burden grows, tax revenue has to go up as well but you are sending all the money into a no tax black hole meaning the tax revenue vs debt payment ratio gets out of whack.

How is this supposed to work again?

I'd consider "Trickle up" anything that creates full employment. If employees are earning more money they pay more taxes. It kind of does work precisely because the tax burden is so high.

> So either we are in a bubble or currency has been devalued.

¿Por qué no los dos? Seriously, to me it looks like we were in a bubble even before COVID, and that has now been juiced up by all the newly printed money sloshing around.

Yeah, possibly. There are most likely multiple, overlapping things happening at once… some inflationary, some deflationary, etc…

You can see some of this in the prices of things like real estate.

You're right it doesn't make sense, this isn't normal corporate finance. Its dotcom funny money.

Hopefully they don’t intend to let Afterpay’s market stagnate in complete isolation, otherwise acquiring would make less sense.

If they can take Afterpay’s product and scale it to their customer base and beyond, that should be worth it.

Even in the Release I was shaking my head. They have 100,000 merchants that seems tiny? I could understand buying market share but at some point don’t you think Someone could tell Jack “hey we can probably build this feature for a few bucks less than $1B. Might take a year or so but we can save a few bucks maybe”

I mean at some point don’t you have t

I don't think building the feature/product is the challenge here. Signing up all those merchants and convincing them to on-board is going to be time and resource intensive. That is what they are buying.

Reply on news.ycombinator.com