Barely two weeks since Apple (APPL) announced plans to offer a “buy now, pay later” (BNPL) service in collaboration with Goldman Sachs (GS), Square (SQ) shook up the BNPL board for a second time on Sunday, announcing that it will acquire Australian BNPL player Afterpay Limited in a $29 billion deal.
Once the acquisition closes in Q1 2022, “Square plans to integrate Afterpay into its existing Seller and Cash App business units [and] enable even the smallest of merchants to offer BNPL at checkout.” In a further demonstration of the deal’s synergies, Square says Cash App customers will gain “the ability to discover merchants and BNPL offers directly within the app.”
Afterpay will bring “more than 16 million consumers and nearly 100,000 merchants globally” into Square’s payments ecosystem, and Square believes acquiring Afterpay will present “an opportunity to drive growth across multiple strategic levers.”
In a note out Monday, Deutsche Bank analyst Bryan Keane largely agrees with that prediction — but Afterpay isn’t the only reason this analyst likes Square stock.
As Keane explains, a few minutes before the Afterpay deal was announced, Square had released its earnings report for fiscal Q2 2021. And “although Afterpay stole center stage [on Monday], Seller strength in the qtr and through July was impressive” even before the big news broke.
Average revenue per user in Q2 exceeded Deutsche Bank’s projections. Seller gross payment volumes (GPV) grew 45% year over year in the month of July (nearly twice the average rate of growth over the past two years) — and Keane estimates that in Q3, Square’s seller GPV could even accelerate to 50% year-over-year growth (with “room for potential upside” besides).
It wasn’t all good news for Square, of course. Keane admits that monthly active users of Square’s Cash App have grown by only 2 million per quarter so far this year, “down from [a] recent run-rate of ~3-4m.” Also, “Cash App gross profit growth moderated” as the quarter progressed, falling from 94% for the second quarter of 2021 as a whole, to just 20% in the month of July. Regardless, the analyst argues that Square’s numbers are still “strong and in-line with historical trends prior to the pandemic.”
Investors by and large appear to agree. Square’s stock price rose more than 10% in Monday trading, after the earnings and Afterpay news came out.
Looking ahead, Keane is sufficiently encouraged by Square’s earnings beat in the quarter, improved gross profit growth in the Seller segment, and even “slightly lower” Cash App growth, to raise his estimates for Square’s earnings this year. The analyst now projects that Square will earn $1.88 in fiscal 2021. He did not raise estimates for either of 2022 (still $2.19 per share) or 2023 (still $2.88) — presumably anticipating that new revenues and earnings from the Afterpay purchase will be offset by dilution from the shares issued to acquire Afterpay. (Payment for that purchase, by the way, will be made all in stock).
In the end, Keane remains convinced that Square stock is still a “buy,” and still worth his $330 price target. (To watch Keane’s track record, click here)
Turning now to the rest of the Street, where Square has robust support among Keane’s colleagues. Based on 21 Buys, 6 Holds and 1 Sell, the stock has a Moderate Buy consensus rating. The average price target among these analysts stands at $301.29, representing ~12% increase from current levels. (See SQ stock analysis on TipRanks)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.