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Is Square Getting a Good Deal With Its $29 Billion Afterpay Acquisition?

By Matthew Frankel, CFP® – Aug 15, 2021 at 7:13AM

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This is a hefty price to pay, but is Square getting its money's worth?

We recently learned that fintech giant Square (SQ -1.43%) has agreed to acquire buy-now-pay-later leader Afterpay in an all-stock deal that values the company at about $29 billion. This is Square's largest acquisition to date, so in this Motley Fool Live video clip, recorded on Aug. 2, contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss whether the hefty price tag Square is paying makes sense.

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Jason Moser: Let's talk about the Afterpay acquisition because I understand the enthusiasm here, I really do. Buy now, pay later is a tremendous opportunity. $30 billion is a tremendous price tag for this business. 

Matt Frankel: I think this is the biggest acquisition that either Square or PayPal (PYPL -4.93%) has ever made.

Moser: Yeah, I think you're right. They say it's $29 billion all stock deal and I think it's great at least Square is doing this at a time when the stock is close to all time highs. It's a fairly cheap form of currency but still, that's a big price tag for a business that is growing by leaps and bounds, but it's still a small business.

Frankel: It's an all stock deal, so Square's diluting shareholders by doing it. Apparently, the market likes this deal, the stocks up 11%. This makes Square almost over $155 billion company all by itself. They are really adding to their outstanding share count. Now, after today's pop it's over $30 billion they're paying for Afterpay because it's all stock. It's based on their stock price, so giving a set number of shares. Afterpay, if you're not familiar, they're based in Australia. They're probably the most comparable competitor to Affirm (AFRM 1.46%) in the buy now, pay later space. buy now, pay later is when you see the little button when you're about to checkout that says, break this into six monthly payments of $100 instead of one $600 payment. That's a buy now, pay later service. PayPal has already built its own.

Moser: Yeah.

Frankel: Affirm is pretty big, especially in the U.S. Peloton (NASDAQ: PTON) is their big customer. Afterpay, they're an Australian company, but the majority of the revenue is from North America. Why they offer interest-free financing, no credit checks, standard buy now, pay later features that appeal to customers. The no credit checks really is appealing as opposed, people always ask the question, why wouldn't I just use a traditional credit card? Because then you have to go through a credit check in the process like that. With buy now, pay later, you just click the button and it's set up and done. Ninety eight thousand active merchant accounts, little over 16 million active customers. They're growing fast, those numbers are up 78% and 63% year-over-year. They're growing pretty quickly. Almost $16 billion of gross merchandise volume was financed through Afterpay over the past year. Pretty big company, almost $700 million in revenue, Square is paying a pretty hefty multiple of that.

Moser: They are. I was looking at this earlier just to try to keep things in context and because you had mentioned Affirm. I mean, Affirm, very similar business focusing on a little bit of a different market opportunity, as you said. But regardless, Affirm, generally, the same business, pretty similar size as far as revenue, at this point. Similar models and that they are still working toward profitability and whatnot. But you look at Affirm. Affirm, $15 billion company today. Just to see the premium that Afterpay is getting versus something like Affirm, it's noteworthy, I think, for a few different reasons. It makes you wonder exactly what they saw in Afterpay really to offer such a premium. Perhaps, part of that is Afterpay and other founder-led business, it seems to be two very similar cultures, though. That's one thing that really stood out to me with Afterpay and with Square, very similar cultures and reasons for existing, focusing on economic empowerment and economic inclusion and equality. Acquisitions always present a fair share of risk when it comes to merging two cultures, it feels like maybe these are cultures that should mesh together fairly well.

Frankel: There are a bunch of good reasons. I mean, I read through the investor presentation there. There are some good reasons. They want to integrate Afterpay into both the seller side of the business and Cash App, make it available for all in Square seller accounts which is in the millions. I mentioned Afterpay has 98,000 active merchant accounts, Square has three or four million. I'm not sure exactly, they don't really announced that number, but it's in the millions. They want to make Afterpay service available to every merchant on Square's ecosystem. They want to integrate it with the Cash App to make it easier for buyers to make their payments and things like that. They're going to be a buy now, pay later service because Square is focused on not just online businesses, they're focused on in-person merchants as well. Buy now, pay later will be available to anyone who accepts Square for in-person purchases, which is a pretty unique feature. Afterpay, I mentioned, they only have 98,000 merchant accounts. Most of Afterpay's customers are large customers. I mentioned Affirm has Peloton. Afterpay also has a lot of enterprise clients. Square would love to build relationships with bigger clients. They break this down in their earnings reports every quarter. How much of their revenue comes from small businesses, mid-sized businesses, larger businesses. The larger business portion has been steadily increasing over time. This could give that little shot in the arm. It expands their merchant relationships on both sides. It's a pretty big market that they could go after.

Moser: Very big market, indeed. What do you think as far as, and we'll move on to Squares' earnings here in just a minute, that old saying, "Sometimes, it's easier to buy it than to build it." It feels like in this case, maybe Square felt like, you know what? This is going to be something that's going to be easier to buy than to build. But the flip side of that is, I don't know, it feels like maybe building it wouldn't have been all that tough if that was something they felt like doing. We've seen PayPal build out their buy now, pay later offering and they're witnessing a ton of success. I guess I wonder, do you feel like Square may be felt a little pressure here, a little pressure on the time side, they needed to get into this market opportunity sooner rather than later?

Frankel: Maybe. That's the really the big reason I could think of is time. Because you mentioned PayPal. I promise you, PayPal didn't spend $29 billion to build out their own buy now, pay later platform. 

Moser: No, I don't think they did.

Frankel: That seems like a big price to pay. The natural question is why couldn't Square have just built it themselves if they had that much money to throw at it and sees that much value in the buy now, pay later business. I mean, obviously, they're not starting from zero, and now, this buys them $700 million of annual revenue.

Moser: Absolutely.

Frankel: They're not starting from zero but that's a hefty price to pay. I'm not totally sold on it. I like the deal, I don't like the number. I think that's a hefty price to pay. 

Matthew Frankel, CFP owns shares of Square. The Motley Fool owns shares of and recommends Affirm Holdings, Inc., PayPal Holdings, Peloton Interactive, and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. The Motley Fool has a disclosure policy.

Stocks Mentioned

Block Stock Quote
$68.18 (-1.43%) $0.99
PayPal Stock Quote
$74.66 (-4.93%) $-3.87
Affirm Stock Quote
$14.62 (1.46%) $0.21

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