Square Inc. (NYSE:SQ) has made waves on Wallstreet after announcing a $29 Billion acquisition with Australian Buy-Now-Pay-Later company Afterpay. The all-share acquisition will enable Square to effectively” accelerate Square’s strategic priorities for its Seller and Cash App ecosystems”.
Square aims to integrate AfterPay services to their Cash app. The Cash app currently has over 40 Million active users, exposing AfterPay services to US and UK customers.
Square stock has traded sideways over the past month, gaining 2.56% for the trading period. However, the addition of Afterpay will widen the companies revenue stream which may see a shift in investor and Wallstreet sentiment. Here’s what this news means for the Square stock forecast.
What the Afterpay merger means for Square investors
The proposed acquisition aims to accelerate three main strategic levers for the company. Under the terms of the deal, Afterpay shareholders (ASX:APT) will receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay ordinary share they hold on the record date.
As the transaction is all-share, the bears are now raising concerns over dilution in comparison to an all-cash acquisition which does not dilute the amount shares outstanding. Nevertheless, the bulls are focusing on the long term implications based on three strategic levers.
Square to acccelerate Cash App growth
The first strategic lever is to Enhance both the Seller and Cash App ecosystems. Afterpay’s global merchant will accelerate Square’s growth with larger sellers and expansion into new geographies according to Square. Square’s Cash app delivered $546 million in the second quarter, growing 94% YOY.
Secondly, the acquisition will Bring added value, differentiation and scale to Afterpay. As the Buy Now Pay Later industry heats up, AfterPay will benefit from the scale Square can offer.
Afterpay consumers will also receive the benefits of Cash App’s financial tools. This includes money transfer, stock and Bitcoin purchases according to Square.
Lastly, the acquisition will Drive long-term growth with meaningful revenue synergy opportunities. More importantly, for Square shareholders the good news is the company expects to see gross profit growth with a modest decrease in Adjusted EBITDA margins.
This financial improvement is expected in the first year post acquisition. Square will be the beneficiary of AfterPays strong growth, with a Compound annual growth rate (CAGR) of 86% over the past two years.
The acquisition is expected to take place in the first quarter of 2022. The acquisition will require approval by the shareholders of both companies as well as meeting all regulatory requirements.
Square stock forecast for 2021
Across the board of 37 Wallstreet analysts, 64% of analysts have listed a Buy rating on the stock. The average price target currently stands at $281.76, representing an upside of 14%. For comparison, competitor Paypal holds a slight advantage with an average target representing an upside of 20%.
BTIG analyst Mark Palmer notes the proposed acquisition will see Square making a big splash in the “buy now, pay later” space. The analyst currently has a Buy rating on the stock with a price target of $295 a share. The bullish target represents an upside of 19% from the current trading price.
Palmer added that Square also outperformed consensus estimates in Q2 highlighting a beat in operating revenues, gross profit and adjusted earnings per share according to theFly.
Q2 results illustrate strong revenue growth
In the second quarter, Square recorded a total $4.68 billion in revenue, up 143% YOY. In particular, the Cash App delivered $3.33 billion of the total revenue, growing 177% YOY.
However, excluding Bitcoin the cash app generated only $606 million in the second quarter. The large portion of Bitcoin revenue generated from the Cash App was as a result of increased customer demand and rising Bitcoin prices.
Square warned investors in the second quarter shareholder letter that Bitcoin revenues are likely to fluctuate as they expect changes in customer demand.
Furthermore, the companies seller ecosystem generated $1.31 billion in revenue. This represents a YOY growth of 81%, highlighting a slower growth rate of the Cash App segment. Nevertheless, its seller ecosystem has rebounded strongly from the effects of COVID-19 in 2020.
Square shareholders can be at ease with the companies liquidity. The company has $7.1 billion in available liquidity, with $4.58 billion in cash and cash equivalents. The cash in hand has improved 47% compared to Q4 of 2020.
Square stock forecast – Revenue outlook
The average revenue forecast for 2021 from analysts expects Square to generate $20.01 Billion annually. This would suggest a realised improvement YOY of 110%.
The main driver for the positive revenue forecast is the Cash App. The company noted in Q3, they expect the Cash App’s gross profit to grow by 212% YOY.
Furthermore, analysts expect this growth to continue into 2022, with forecasts predicting Square to generate $22.83 Billion annually according to Yahoo Finance data.
It is worth noting that the 2022 forecast is expected to change if the acquisition is realised.
Whats the risk for Square stock investors
As we have seen throughout history, an all-share acquisition will see the target stock rally and the acquiring stock fall. Why is this?
With an all-share transaction, the acquirer is offering shares to existing target shareholders instead of instead using cash to pay existing shareholders. In todays era, we tend to see a mixture of both cash and share offers to target shareholders.
In this case, we will likely see an initial downtrend in Square stock as investors prepare for the shares outstanding to increase upon the close of transaction. Nevertheless, the acquisition is a long term strategy to boost revenues and hence increase the share price. This is the trade off the acquiring shareholders face in acquisitions like these.
The Bottom Line – Square stock forecast
Overall, the proposed acquisition looks to provide Square some strong long term benefits including increased revenue and gross profit alongside a wider offering for existing customers.
Square currently maintains a bullish sentiment on Wallstreet with an average upside of 14%. However, we may see the analysts lower their targets as the company closes in on the merger based on dilution of stock.
This of course is the risk, while long term shareholders will focus on the big picture. If shareholders are looking for more information on AfterPay, click here.
The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
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