Afterpay to Surge as it Moves into Banking

Afterpay is the leader in the Buy Now Pay Later (BNPL) space and it has now signalled it wants to take on the big banks by getting into banking in the hope of reducing its reliance on BNPL. Some analysts are suggesting this is a great move, which will create enormous upside potential for Afterpay’s share price while other analysts are not so positive. While the big four banks dominate the banking sector in Australia, many new entrants have tried to break their strangle hold, so it will be interesting to see if Afterpay can make any inroads.

Afterpay to take on the banking sector

The big banks are known for letting newcomers build products and services, and allowing them to do the heavy lifting to develop and mature a market segment in order to prove the concept is viable long term. Apple does this very well, as they did not invent the smart phone or iPod, yet when they entered these markets they did it better and dominated very quickly.

Afterpay has been a great growth stock for investors over the last four years although anyone who believes this will be replicated over the next four years will most likely be disappointed. In the near future, Afterpay will be subject to more scrutiny and increased competition that will challenge its ability to generate ever increasing revenues.

ASIC is looking at the BNPL area with a view to regulating it more, which I believe is long overdue, with any increased regulation increasing costs and potentially adding restrictions to how business is done. And with the move into banking, Afterpay will have to deal with even more regulation and scrutiny.

It is possible that the big banks will have BNPL companies on their radar as takeover targets or they will launch their own service possibly in conjunction with credit card providers like Visa and Mastercard or other payment services, such as Apple Pay or Google who have both signalled in recent weeks their intention to get into the BNPL space.

Afterpay has also entered the US and European markets, which represents great opportunities, but I suspect their journey in these countries will not be smooth as it was in Australia, which means they will have to mature as a company and prove they are not just a good company but a great company.

What were the best and worst performing sectors last week?

The best performing sectors last week included Healthcare up 4.71 per cent followed by Consumer Staples up 2.19 per cent and Consumer Discretionary up 1.80 per cent. The worst performing sectors included Energy, which was down 1.73 per cent followed by Materials down 1.15 per cent and Industrials down 0.74 per cent.

The best performers in the ASX/S&P top 100 stocks included Fisher & Paykel Healthcare up 7.59 per cent followed by CSL up 5.67 per cent and Wesfarmers up 4.75 per cent. The worst performing stocks included Altium down 9.41 per cent followed by Evolution Mining down 9.38 per cent and Crown Resorts down 8.41 per cent.

What's next for the Australian share market?

Once again, the Australian stock market is a tale of two halves given that for part of last week price moved in one direction before moving in the opposite direction. Early in the week, the market fell strongly with the All Ordinaries Index down 2 per cent at one stage only for it to rise strongly over the next few days to regain all of its lost ground plus some. In a good sign, last Friday the market not only achieved a new all-time high but it managed to close high for the week, which it has struggled to do over the last month or so.

Given the strong close last week, this could be a sign that the All Ordinaires Index may continue to rise up to 7,800 points over the coming weeks. That said, as we have seen many times in the last year, the market has had a mind of its own and has often done the unexpected. With the current COVID-19 situation, not just in Australia but around the world, it is hard to see our market being in a sustained bull run. Given this, I believe the current state of uncertainty is likely to persist, which is why I strongly recommend that investors exercise caution before they decide to invest and buy only quality stocks rather than speculate on low priced penny dreadful stocks.

For now, good luck and good trading.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online.