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Afterpay graduation to NASDAQ is a winner for Australia

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By John Beveridge - 
Afterpay Square ASX APT NYSE SQ

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If you are looking for a great reason to give Australian investors and our share market a pat on the back, there is no better reason than the announcement that buy now pay later (BNPL) company Afterpay (ASX: APT) is set to list on the NASDAQ exchange.

True, it may be a bit disappointing that such a fast-growing company is going to spread its wings and fly on the world stage but there aren’t too many countries that have successfully fostered a $35 billion-plus company that was only founded in 2015.

Of course, the United States is one country that has successfully fostered such rapid growth and there are many very good reasons why the move to NASDAQ is an essential next step for the BNPL trailblazer.

Leaving plenty of space to grow

The most important is that the move will give Afterpay plenty of room to keep growing.

While it is something of an oddity on the Australian market, having come from literally nowhere to be one of our 20 largest companies by market capitalisation, in the US, Afterpay will still rank as a tiddler.

The true tech giants such as Amazon (US$1.68 trillion/A$2.16 trillion), Apple (US$2.25 trillion/A$2.9 trillion), Google (US$1.56 trillion/A$2.01 trillion) and Microsoft (US$1.97 trillion/A$2.54 trillion) dominate the scene there, but there are scores of technology and other companies of a similar size to Afterpay – some we would never have heard about here.

That will give Afterpay a lot more latitude than if it started growing bigger than some of the Australian banks, which is not inconceivable given its current growth rate.

Access to capital won’t be a problem

Moving to NASDAQ will also allow Afterpay to access plenty of capital, although there are no indications that it has been capital starved in Australia.

However, with Afterpay growing particularly strongly in the US market after reaching $1 billion in sales in one month, that sort of success will logically open up perhaps cheaper and more plentiful sources of capital.

Although you probably won’t find it trumpeted when Afterpay releases the shareholder presentations for its planned US listing, one of the biggest attractions of moving is to enjoy the better valuations on offer in the US.

US markets offer better valuations

It only makes sense that in a deep capital market that is accustomed to valuing technology companies, Afterpay shares will trade at a premium compared to what they would fetch in Australia.

Here we are relative experts in valuing banks and mining companies but with such a small technology sector, it is probably a big ask for Australian investors to be as sophisticated – or perhaps as brave and optimistic – as our US counterparts.

The deep pool of US investment funds also includes some that are only allowed to invest in the US, giving Afterpay an advantage to staying listed only in Australia.

Australian investors are also accustomed to a dividend model of shareholder reward, although, to be fair, CSL (ASX: CSL) has been an excellent company in pioneering share splits and other methods of rewarding shareholders without needing to build up lots of franking credits and lots of cash to pay out as a dividend.

By contrast, most US companies pay very tiny dividends and sometimes none at all, preferring to plough cash back into growing the company and rewarding shareholders through a rising share price rather than regular payments.

That US pattern is particularly attractive for technology companies, many of which are unprofitable for many years even as they are growing to dominate a market segment.

Amazon is a great example, suddenly becoming super profitable when it finally emerged from those growth years when it was building market share at the expense of current profits.

What does it mean for Australian shareholders?

One question that will take a while to answer is what happens to existing Australian investors in Afterpay.

One thing that won’t change is that Afterpay will keep its head office in Australia, even if its share market listing moves to the US.

While the company has appointed advisers Goldman Sachs to explore the move, it is early days in the process and there are a number of ways the US listing could be achieved.

Afterpay is likely to remain listed here in Australia in some form, with the most likely answer being ASX-listed CHESS Depository Interests (CDI).

Another option, which seems less likely, would be to delist on the ASX and relist on NASDAQ, with current shareholders automatically getting shares in the NASDAQ listing.

This would be a little more complex for Australian shareholders because they would need to have or open an international trading account to buy or sell shares in Afterpay.

Probably the least likely scenario for Afterpay would be a dual listing in the ASX and NASDAQ, although it is technically possible.

Departure of Afterpay leaves room for new innovators

Whichever option is chosen, in some respects the Australian exchange will have lost one of its shining lights in technology and innovation.

While it is possible to get upset about that, it is also possible to see the departure of Afterpay as leaving room for more Australian innovation to grow in its place.

Having impressive Australian growth stocks such as Afterpay and Atlassian listed offshore shows that we can grow global companies in Australia.

The trick now will be identifying and investing in the next big thing when it is still just getting started as a small cap stock on the ASX.