Shares of Square (SQ) are on the rise on Monday after the digital-payments platform said it was buying the "buy now, pay later" company Afterpay (AFTPF) in a $29B all-stock deal. Commenting on the news, BTIG analyst Mark Palmer called the acquisition a "big move" into "buy now, pay later," while his peer at Piper Sandler said it creates a "powerful opportunity" to enable Square's merchants to adopt BNPL. Looking at Affirm (AFRM), Stephens analyst Vincent Caintic said he believes the acquisition has "direct implications" for the company as Afterpay is already "a tough competitor."
AFTERPAY ACQUISITION: Square and Afterpay announced on Sunday that they have entered into a Scheme Implementation Deed under which Square has agreed to acquire all of the issued shares in Afterpay by way of a recommended court-approved Scheme of Arrangement. The transaction has an implied value of approximately $29B based on the closing price of Square common stock on July 30, 2021, and is expected to be paid in all stock. The acquisition aims to enable the companies to better deliver compelling financial products and services that expand access to more consumers and drive incremental revenue for merchants of all sizes. The closing of the transaction is expected in the first quarter of calendar year 2022, subject to the satisfaction of certain closing conditions.
Square also reported second quarter adjusted earnings per share of 66c, which was better than the expected 30c, and revenue of $4.68B, with consensus at $4.99B. Excluding bitcoin, total net revenue in the second quarter was $1.96B. The company said that, "In the second quarter of 2021, Adjusted EBITDA and the issuance of senior unsecured notes contributed positively to our cash balance. This was partly offset by cash outflows due primarily to the acquisition of TIDAL and payments for tax withholding related to vesting of restricted stock units."
BIG MOVE INTO BNPL, 'POWERFUL OPPORTUNITY': BTIG analyst Mark Palmer believes that with the acquisition of Australia's Afterpay in an all-stock deal worth $29B, Square has positioned itself to make a big splash in the "buy now, pay later" space. The company also posted its second quarter results, the release of which had been slated for Thursday, which featured outperformance versus consensus estimates in operating revenues, gross profit, adjusted earnings per share and gross payment volume, Palmer highlighted. The analyst has a Buy rating and a price target of $295 on Square's shares.
Also commenting on the news, Deutsche Bank analyst Bryan Keane noted that Square's "strong" quarter was overshadowed by the acquisition of Afterpay. The analyst believes the integration of Afterpay will help further connect the Seller and Cash App ecosystems, "increasing the velocity" of payment flows with higher engagement while expanding Square's total addressable market "considerably." The deal drives more commerce opportunities between consumers and merchants, pushing higher monetization per user, he added. Keane reiterated a Buy rating on Square.
Meanwhile, Piper Sandler analyst Christopher Donat told investors in a research note he likes that the deal combines Square's merchant-focused Seller business with a "fast-growing buy now pay later leader." This creates a "powerful opportunity" to enable Square's merchants to adopt buy now pay later, Donat contended. However, he's "less enthusiastic" about the valuation, at 25.5 times consensus 2022 revenue for Afterpay. Donat kept a Neutral rating on Square with a $250 price target.
'DIRECT IMPLICATIONS' FOR AFFIRM: Stephens analyst Vincent Caintic believes Square's acquisition of Afterpay has "direct implications" for Affirm as Afterpay is already "a tough competitor." He expects the combination with Square to "put even more pressure on Affirm's market share and take rate" and though Afterpay's valuation implies a $18.6B market cap, or $70 per share valuation, for Affirm, Caintic doubts Affirm would sell at that price given that its stock has previously traded above $140 per share., The analyst also told investors that the Square/Afterpay combination makes him more positive on the home improvement players in "Buy Now Pay Later," ECN Capital (ECNCF) and GreenSky (GSKY), which are not directly competing against Afterpay/Square.
Additionally, he views the deal news as negative for incumbents Synchrony (SYF), Alliance Data (ADS), American Express (AXP) given that competition will increase and the view that Afterpay's high price makes it harder for the incumbents to add capabilities via M&A purchases. Caintic has an Underweight rating on Affirm shares.
PRICE ACTION: In Monday morning trading, shares of Square have gained over 9% to $270, while Affirm's stock has also jumped about 9% to $61.66. Meanwhile, Afterpay shares trading in New York are up 35% to $95.93.
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ECN Capital
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Synchrony
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American Express
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