Stock of the week - Square (03.08.2021)

While the broad US stock market traded lower on Monday, Square Inc (SQ.US) outperformed, gaining over 10%. US fintech company announced a massive buyout of Afterpay, a very popular Australian company offering financial services. Acquisition was well received by investors as it will help increase Square's presence in the Asia-Pacific region. Let's take a closer look at the deal

$29 billion buyout

Square Inc. announced that it will acquire Afterpay, Australian financial services company, in an all-stock merger. Square's offer values Afterpay at $29 billion, or 30% above pre-announcement valuation. Acquisition will not only help Square boost its presence in the Asia-Pacific region but also will allow it to expand into the "buy now, pay later" market, where Afterpay has a solid position. Deal is expected to close in the first quarter of next year.

"Buy now, pay later"

Afterpay is a big player in the Asia-Pacific "buy now, pay later" market (BNPL). Company offers customers an ability to make online payments instantly and settle the payment with Afterpay via 4 interest-free installments. If a customer missed the deadline on installment payment, a late fee is being charged. Company has 16 million customers and is said to have greatly contributed to declining use of debit cards in Australia. BNPL market is booming as companies like Afterpay rarely place strict limits on who can use their services. BNLP transactions rarely exceed a thousand dollar value therefore credit risk for the company is limited. Over 80% of revenue Afterpay generates from merchant fees and just slightly above 15% in 2020 was generated from customers' late fees.

Solid Q2 results, large Bitcoin impairment

Square was set to release its Q2 2021 earnings report on Wednesday this week. However, the company published results ahead of schedule, on Sunday along with the Afterpay merger announcement. Company reported a 143% year-over-year increase in total revenue, to $4.68 billion. Bitcoin-related revenue jumped threefold and reached $2.72 billion. Company said that gross profit on Bitcoin was $55 million. Company also recorded a Bitcoin-related impairment of $45 million. Total gross profit almost doubled to $1.141 billion while net income reached $204 million. Results were broadly better than expected and it contributed to a big share price jump on Monday.

Market reaction to earnings release and acquisition announcement was positive. Stock finished yesterday's trading 10.16% higher, while the S&P 500 dropped 0.19%. Taking a look at the chart we can see that the share price rallied from a near mid-point of the upward channel toward the upper limit and above. Rally was halted by a resistance zone marked with early-year local highs ($280 area). Source: xStation5