'Becoming JP Morgan of the Future': Square (SQ) Dips on Deal to Acquire BNPL Afterpay For $29B in Stock, Benefits Outweigh High Price Says Analyst

August 2, 2021 6:22 AM EDT
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Square (NYSE: SQ) announced it is acquiring the Australian company Afterpay in an all-stock deal valued at $29 billion.

Jack Dorsey’s SQ agreed to pay a premium of about 30% compared to the Friday closing price to acquire the company specialized in offering Buy Now Pay Later (BNPL) services.

“Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles. Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands,” said Jack Dorsey, Co-Founder and CEO of Square.

Square said the acquisition will accelerate its strategic priorities for Seller and Cash App. The plan is to integrate Afterpay into Square’s current offering and allow merchants to offer BNPL at checkout.

“Buy now, pay later has been a powerful growth tool for sellers globally. We are thrilled to not only add this product to our Seller ecosystem, but to do it with a trusted and innovative team,” said Alyssa Henry, Lead of Square’s Seller business.

Afterpay services have more than 16 million users globally and almost 100,000 merchants. The company has quickly risen to popularity among younger generations as it allows customers to pay for products in four interest-free installments. However, penalties are applied if the user misses an automatic payment.

“By combining with Square, we will further accelerate our growth in the U.S. and globally, offer access to a new category of in-person merchants, and provide a broader platform of new and valuable capabilities and services to our merchants and consumers. We are fully aligned with Square’s purpose and, together, we hope to continue redefining financial wellness and responsible spending for our customers,” said Anthony Eisen and Nick Molnar, Afterpay Co-Founders and Co-CEOs.

Mizuho’s Dan Dolev has weighed in to share generally positive commentary on the Afterpay acquisition. He rates Square (SQ) with a “Buy” rating and a $300.00 per share price target.

“We see acquiring Afterpay as an important step, opening SQ up to the global $10Tn online payments TAM, adding $32 in ARPU, and helping SQ create a closed-loop payment rail system backed by Bitcoin & DeFi,” Dolev wrote in a note sent to clients Sunday.

On the valuation and the question whether SQ overpaid for a company that is yet to become profitable, he adds:

“Nearly 30x '22E sales isn't cheap, but we believe the long-term strategic benefits outweigh any near-term valuation concerns. We expect a mixed stock reaction amid execution concerns and vague July Cash App comments. We believe Afterpay makes long-term fundamentals stronger, as SQ inches closer to becoming the JPM of the future,” the analyst concluded.

Shares of Square are down more than 3% in pre-open Monday while Afterpay share price closed 18.77% higher in today’s Pacific trading session.

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