Why Investors Should Not Measure Dorsey’s Twitter and Square by Same Ruler

Square (SQ) on Friday announced the acquisition of Afterpay Ltd. in an all-stock deal worth around $29 billion, which, according to WSJ, illustrated how restlessly the fintech companies are seeking synergy to challenge banks for a bigger slice of the payments industry. Square IR said in a statement a key attraction of the deal was a “growing wariness toward traditional credit among younger consumers”, a group particularly hard hit by the Covid-19 pandemic, as lockdowns crushed many hospitality and casual jobs while the U.S. Federal minimum wage of $7.25 an hour no longer corresponds with the bulging retail price tags.“Square and Afterpay have a shared purpose,” said Jack Dorsey, a celebrity Square's CEO. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”

Australia-based Afterpay, which has yet to become profitable, says this approach limits mounting bad debts – a new worldwide Covid-induced big problem, particularly in a downturn when job security tends to diminish and household finances are stretched. Afterpay’s technology allows users to pay for goods in several (currently four), interest-free deferred payments, on the purchased and immediately deliverable shopping merchandise. Customers pay a fee only if they miss an automated payment, which also triggers their accounts lockings until the balance is repaid. Most of Afterpay’s revenue comes from retail merchants, which willingly pay commissions apportioned from the value of each order placed by customers, plus a fixed service subscription fee.

Square plans to integrate Afterpay into its existing Seller and Cash App business units. The deal is expected to close in Q1 2022. Afterpay shareholders will receive a fixed exchange rate of 0.375 shares of Square Class A common stock for each Afterpay common share. Square may opt to pay 1% of the total conversion deal in cash. Square is paying an implied transaction value of A$126.21/share for Afterpay, or a 30.6% premium to the Australian company's last closing price.

Also, Square released its semiannual earnings report on Friday, according to which its Q2 Non-GAAP EPS of $0.66 beat the consensus forecast by $0.35, while GAAP EPS of $0.40 also exceeded it by $0.45. Revenue of $4.68 billion soared +143.8% You, but missed an excessively rosy expectation by $370 million, which, in our view, is not a big deal. Q2 gross payment volume increased 29% QoQ as the Seller and Cash App ecosystems continued to gain traction. Q2 gross payment volume of $42.8 billion, was sharply up from $33.1 billion in Q1 and $22.8 billion in Q2 2020. Square’s notorious Cash App reached 40 million monthly transacting active users in June.

Shares of Square are not holding to their highs though: while on Friday their initial retreat was mostly attributed to external market factors, today's premarket plunged by almost 3.6% acts as something to worry about. Over the past 6 months shares of both Dorsey’s public projects, well-known social media giant Twitter Inc. (TWTR), and Square have been trading sideways in quite a wide price range. However, investors should not intuitively link both events to each other. While Twitter’s shaky performance owes much to erratic monthly active user dynamics in the wake of blocking of certain accounts violating its updated rules, Square’s uneven pace was due to poor performance of Bitcoin (Square is known for currently holding over 8,000 Bitcoins, worth approximately $320 million, giving it the third-largest bitcoin holdings of any publicly-traded company). This means, that with the ongoing recovery of the cryptos, and also considering the apparently strong synergy in the wake of the acquisition of Afterpay, the latter unveils much better prospects of returning to a more bullish pattern.