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Will the Afterpay share price stop at $40 or keep on running?

The Afterpay Ltd (ASX: APT) share price run has left the returns of the S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO) as an afterthought. However, as its share price flirts with record all-time highs, could this spell the end of a spectacular run or does Afterpay have more to give to its shareholders? 

Solid business update 

Afterpay’s business update provides much-needed insight as to how the business and broader buy now, pay later sector is performing amidst the coronavirus epidemic. Its online sales in March represented 88% of total global underlying sales, demonstrating the business’s significant exposure to online spending. March showed strong underlying sales across all markets, with average daily underlying sales up 12% on January and February. 

However, underlying sales in the second half of March moderated at a Group level. Global underlying sales in the second half of March versus the first half of March were 4% lower. March could arguably be the trough of sales performance – the first two weeks of April in all markets saw average daily underlying sales up approximately 10% on the second half of March.

Overall, Afterpay delivered an impressive business update that outlines the businesses versatility in changing business conditions. Its US business experienced a 263% increase in sales on the prior corresponding period and is on track to overtake Australian sales. 

I believe the Afterpay growth trajectory is unhinged. Moving forward, the growth of its US business will be the centrepiece of its performance. 

Tencent’s substantial shareholding pumps up price

Chinese tech conglomerate, Tencent confirmed its substantial shareholding in Afterpay on 1 May. Tencent had acquired approximately $390 million worth of Afterpay shares at an average price of $22.

While this change in substantial shareholding does not mean anything material for Afterpay, it does create a lot of speculation as one of China’s biggest companies has taken an interest. This announcement has pushed the Afterpay share price up almost 40% in 2 weeks. 

Valuation makes buying challenging 

Afterpay currently has a market capitalisation of approximately $11bn. The Tencent announcement alone has added almost $3 billion to its valuation. I believe without further market sensitive announcements such as business updates, the Afterpay share price will struggle to break out above its record all-time highs. 

At the same time, the general index will also influence how the Afterpay share price moves. While the market is volatile, an unprecedented amount of stimulus has buoyed asset prices. With the US attempting to pass a $3 trillion coronavirus relief bill and Australia reopening its economy, the market could continue to trend upwards in a volatile fashion. 

Foolish takeaway 

I love where the Afterpay business is going and the attention it is receiving from global players. However, where its share price stands today makes it a difficult buy case and underwhelming risk/reward. I would wait for its share price to cool down before making an investment. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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