Is Afterpay the next stock to watch?

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Afterpay is the leader in the Buy Now Pay Later (BNPL) space and it has now signalled it wants to get 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 stranglehold, so it will be interesting to see if Afterpay can make any inroads.

afterpay shares

The big banks are known for letting newcomers build new 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 as well, as they did not invent the smartphone 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.

Best and worst performing sectors this week

The best-performing sectors this week include Healthcare up more than 3% followed by Consumer Staples and Consumer Discretionary, which are both up more than 1%. The worst performing sectors include Materials down more than 1% followed by Industrials and Energy, which are both down under 1%.

The best performers in the ASX/S&P top 100 stocks include Nine Entertainment Co up more than 6% followed by Oil Search up more than 5% and CSL up more than 4%. The worst-performing stocks include Evolution Mining down more than 13% followed by Altium down more than 10% and Crown Resorts down more than 6%.

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 the 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% at one stage only for it to rise strongly over the next few days to regain all of the lost ground. As I have alluded to previously, it will be interesting to see where the market closes on Friday, as it has continued to be uncertain and lack direction over the last two months.

If the market closes up strongly, it may continue to rise up to 7800 points over the coming weeks.

That said, it has not closed strongly for three of the last four weeks, so if the market turns to fall away to close low once again, then this current state of uncertainty will likely persist, which is why I strongly recommend that investors exercise caution before they decide to invest.

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Dale Gillham is chief analyst for Wealth Within (AFSL 226347). He has an Advanced Diploma and Diploma of Share Trading and Investment and more than 25 years' experience in the financial services industry.