Time to Buy SQ Stock, Post-Acquisition Announcement?

Investors in digital wallet and payments play Square, Inc. (SQ) have certainly been on a nice ride of late. This week, the company announced the acquisition of financial technology platform Afterpay, which took Square stock 10% higher in Monday trading. The highly touted move has made headlines for more reasons than one.

First, this $29-billion acquisition is Australia’s biggest ever (shout out to the Aussie readers). As a leading ‘buy now pay later’ (BNPL) platform, Square sees a number of verticals to exploit between the companies, and we’ll get to those in a second. 

Secondly, this acquisition signals that Square is far from content to rest on its laurels in terms of finding growth. The company will continue to be aggressive, and will leverage its massive valuation to do acquisitions that can create value. Long-term growth investors ought to like this deal, which is one most tech companies would not even attempt. (See Square stock charts on TipRanks)

Let’s dive into some of the details of this deal, and see how it improves Square’s positioning in the market right now.

Big Acquisition Signals Expansion of Ecosystem for SQ Stock

This week’s announced acquisition is notable, for a few reasons.

As the company stated in its press release on the matter, this deal “brings together two of the fastest growing global fintech companies to advance shared mission of economic empowerment and financial inclusion.” This shared mission is a big deal for Square, and the company highlights this fact multiple times in its release. Focusing on building “a more fair, accessible, and inclusive” financial system is what both companies are after. The hope is that these companies can do more good as a combined entity than they could on their own.

Upon looking closer at the details of the deal, the $29-billion price tag makes sense, considering the synergy potential between these two companies. This deal improves Square’s aim of delivering innovative and enticing financial products to its growing customer base. 

Square hopes to connect the company’s fast-growing Cash App and ecosystems to create value for consumers and shareholders. Sellers of any size will be able to utilize the BNPL functionality that Afterpay offers, in order to grow their businesses. The hope is that as transaction volume increases, Square’s overall fee-driven revenue model will surge over time.

Growth Opportunity Recognized by the Market

Typically, when a deal of this size is done, the acquirer (in this case Square) sees a significant valuation hit. Perhaps this wasn’t the case for Square for two reasons.

First, and perhaps most importantly, it appears investors recognize the potential game-changing value in bringing in a BNPL technology into Square’s already impressive arsenal. It can positively affect long-term earnings growth. Is it possible Square could have developed an Afterpay-like product itself? Possibly. However, this acquisition removes a large global competitor from the mix, while also accelerating Square’s move into this space. These factors are being viewed as broadly positive by investors this week.

Second, this was an all-stock deal. Square isn’t blowing up its balance sheet to do it. Investors in Afterpay will retain upside to Square stock, should they wish to hold. For long-term growth investors, this is the kind of move that makes sense. For those who think SQ stock may have gotten a bit ahead of itself, issuing shares rather than taking on debt makes sense. 

Additionally, Square further extends its international reach as a result of this deal. The Asia-Pacific region is one many companies are looking to target. Afterpay’s strong market ties in this area should bode well for investors bullish on Square’s potential outside its core U.S. market.

What Analysts are Saying about SQ Stock

According to TipRanks’ analyst rating consensus, SQ stock comes in as a Moderate Buy. Out of 28 analyst ratings, there are 21 Buy recommendations, six Hold recommendations, and one Sell recommendation.

As for price targets, the average Square price target is $304.42. Analyst price targets range from a low of $185.00 per share to a high of $380.00 per share.

Bottom Line

There’s reason to like this deal, on many levels. On the one hand, the combination of two companies with nosebleed-high valuations may entice some investors to step back. However, it’s likely that most of Square’s investor base is interested in hyper-growth opportunities. Accordingly, in some ways, it’s unsurprising to see SQ stock react to this acquisition news as it has.

Square is an innovative, fast-growing company with tons of long-term growth potential. Risks related to slowing growth over time seem to be less of a concern following this acquisition announcement. Perhaps more deals are on the horizon, if investors are going to react this way. Time will tell.

Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.