Payment and point-of-sale (POS) service provider Square (SQ) offers a comprehensive commerce ecosystem that allows sellers to bring software, hardware, and payments services from several vendors under one roof.
On August 2, Square inked a definitive agreement to acquire Afterpay for $29 billion. This will not only help the company tap into the buy now, pay later (BNPL) space but also grow its international footprint exponentially.
Notably, the United States has persistently lagged in the adoption of the BNPL solution as most citizens prefer to use credit cards. However, BNPL is slowly and steadily gathering momentum in the U.S. market, giving Square a golden opportunity to thrive.
A report by Worldpay, Inc., an American payment processing company and technology provider, revealed that BNPL constituted 2.1% of worldwide e-commerce transactions in 2020. As the uptrend continues, BNPL is expected to double its share in the e-commerce market by 2024. This projection makes the prospects of Square’s impending acquisition of Afterpay bright.
Moreover, Square’s solid second-quarter 2021 results, which were released on August 2, along with the acquisition announcement, helped its shares rally 10.2% to close at $272.38 at the end of Monday’s trading session. (See Square stock chart on TipRanks)
Notably, Square witnessed tremendous traction in Seller and Cash App and registered strong revenues from these streams. The segments’ gross profits grew 85% and 94% year-over-year, respectively. The company’s positive operating leverage also led its earnings per share (EPS) of 66 cents to surpass the consensus estimate of 31 cents.
These positive developments have encouraged Needham analysts, led by Mayank Tandon, to maintain a Buy rating on Square, while raising the price target to $350 from $310 (28.5% upside potential).
Tandon said, “We remain positive on SQ given the building momentum in the Seller and Cash app businesses. In addition, we believe that the Afterpay deal will provide additional opportunities to enhance LT (long-term) growth and profitability.”
In the earnings commentary, the management gave a peek into Square’s July trends and stated that gross payment volume (GPV) had increased 45% year-over-year during the month, driven by the reopening of economies.
Tandon considered a few other points while updating his model on Square. He stated that the company was expecting a rise in transaction and loan losses to the tune of $20 million sequentially in the third quarter. Moreover, a $1.1-$1.2 billion year-over-year growth in Selling, general and administrative (SG&A) expenses is also likely in 2021.
The analyst suggests shares of Square to aggressive growth investors, who are looking for “exposure to the secular trends driving digital payments.”
Consensus among Tipranks’ analysts for Square is a Strong Buy based on 19 Buys, 4 Holds and 1 Sell. The average Square price target of $297.43 implies 9.2% upside potential.
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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.
