Should Paypal be concerned about Square’s acquisition of Afterpay?

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Square Rg-A will acquire Afterpay, company dedicated to “Buy now and pay later”, for a value of $ 29 billion. Meanwhile, PayPal HoldingsIt already offered a similar service up to 4 installments on purchases. But the balance could tip in Square’s favor after the acquisition, according to Leo Sun en The Motley Fool.

Square recently agreed to buy Afterpay, an Australian “buy now pay later” (BNPL) service provider, for $ 29 billion in shares. The agreement represents a premium of 21.9% on Afterpay’s ten-day weighted average share price and values ​​the company at 25 times this year’s sales.

Square shares rose after the announcement, which accompanied a strong report from the second trimester on August 1 that exceeded analysts’ expectations. Meanwhile, rival PayPal’s shares, which had already fallen following its July 28 second-quarter mixed report, fell further after Square released its earnings report and announced the Afterpay deal.

Square’s acquisition of Afterpay counteracts the service BNPL “Pay in 4” PayPal, which launched last August. Both Afterpay and Pay in 4 allow customers to pay for goods in four interest-free payments, but Square plans to integrate Afterpay into both its seller ecosystem as in its fast-growing Cash app, which already offers peer-to-peer payments, bitcoin, purchases, and stock trading services.

“Should PayPal investors be concerned about Square’s latest move? Or is there enough room for both companies and their other rivals to thrive in BNPL’s expanding market? ”Says Sun.

Square’s acquisition of Afterpay, which will close in first quarter of calendar 2022, initially it seems expensive. You will pay out nearly a quarter of your market capitalization, and significantly dilute your existing shares with a stock transaction, for a company that is likely only will increase your 2022 revenue by approximately one 5%.

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The Afterpay income they increased a 78% in fiscal year 2021, which ended in June, but the income from Square they increased a 101% in 2020 and are expected to increase by 102% this year. So Square appears to be paying a high premium and diluting its shares for a slower-growing company.

However, Square’s growth in 2020 and most of 2021 was largely driven by the bitcoin trading during the pandemic. If we exclude those bitcoin sales, Square’s revenue only increased by 17% in 2020, and analysts expect its total revenue to grow by just one 13% in 2022 as those cryptocurrency exchanges normalize.

However, they still expect Afterpay’s revenue to increase by 66% in fiscal year 2022, so it could generate smoother growth than Square’s volatile core business. Afterpay would also expand Square’s presence overseas, as it only generates about half of its underlying sales in the United States.

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