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Square’s acquisition of Afterpay ‘makes a lot of sense’: analyst

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BTIG managing director and financials analyst Mark Palmer discusses Square’s acquisition of Australia-based fintech company Afterpay, including why the deal makes sense for the companies and his outlook for the finch space.

Video Transcript

- Top story today Square announcing last night that it has acquired Afterpay in a $29 billion deal all-stock transaction, bringing Square deeper into the buy now or really bringing it into the Buy-Now, Pay Later space. Square also out with its earnings results last night, shares up about 4% in early trading at last check.

Joining us now to talk about this deal and everything else going on in the fintech space. Mark Palmer, managing director and analyst over at BTIG. So Mark, let's just start with your first reaction when you saw the news last night. The Square going out using their stock to make a splashy acquisition.

MARK PALMER: First of all, thanks for having me on. This deal makes a lot of sense for Square especially insofar as it enabled the company to expand significantly both in terms of product line and globally by using its stock as an acquisition currency. Buy-Now, Pay Later is an interesting space. It's an online payment method through which consumers can pay for items in installments, it has really taken off during the pandemic.

If anything Square was a bit late to the game. In this regard, you've got a lot of established players out there Klarna, Affirm, you have others such as PayPal, Amex, who have gotten into the space. You know so Square-- this was a bit of a departure from their typical approach which is to innovate organically, but they really need to catch up and this enables them to do that.

- Mark, you also cover PayPal and I see the shares down about about one year on about 1% here in the early going. What does this acquisition mean to the competitive environment, and if you own PayPal shares, should you be concerned about the moves that Square continues to make?

MARK PALMER: I don't think so. You know, I think that frankly PayPal is a behemoth within the fintech space. They have multiple avenues for revenue growth. Buy-Now, Pay Later is something that PayPal did build organically, and they've already grown it to a very significant size. If anything, we think that Paypal's growth did put some pressure on Square in that regard.

But, but the bigger picture, you know, who is we're thinking about is, they're doing this. It's not so much PayPal, it's really others like strike, which is a giant in terms of online payment processing. And we've seen increasing overlap between what Square is doing and what stripe is doing. So I think more along those lines.

The other thing is that if a Square is looking to be able to compete with the likes of visa and Mastercard with the card networks, they need to be able to grab more of the consumer's wallet. And do so as quickly as possible, this helps them to do that.

- Well, now you have Klarna out there Mark, last capital raise for them valued the company at $46 billion. If you're Klarna do you sell out and who would be a buyer?

MARK PALMER: Well I think there's always the question about whether it's better to sell or simply to go the public route. And let the market judge that. Frankly, Affirm did go public through a direct listing, its stock has not been a great performer. And that might help to inform view in terms of who they would sell to.

Again, who are the big players who are out there, you know, in the space. You know a good example of this is, is American Express. You know, which, which is doing this, even Apple you know, is involved in this game. So you know is it, is it possible that a aquarena hmm for that matter a firm. Which is public but it certainly could be taken over.

You know could be part of consolidation? Absolutely. What we do anticipate certainly is that we are going to see much more consolidation in the fintech space going forward. And this is just starting.

- Yeah, you know, Mark, seducing you brought up some of those traditional credit card issuers and obviously differences between the network and Visa and so on and so forth. But I'm curious how, how you see those traditional players, let's say that. US consumers are more familiar with fitting into this new world. Where buy now pay later, I mean, every time I buy something online, it's an option.

And as our viewers know, I've used it. Sometimes it's actually not as good a deal as you would think. And just where that fits into kind of the consumers stack these days as, as online e-commerce. You know obviously continues to gain share.

MARK PALMER: Well I think what we have seen is that Buy-Now, Pay Later tends to appeal to budgets-- budget conscious younger consumers who you know, typically are somewhat risk averse and prefer debit cards to credit cards is an example. And buy now, pay later is an alternative to using credit cards, So it definitely fits in that regard. What's remarkable if you look at some of the cohort metrics coming out of Afterpay is the amount of repeat business, that these customers do.

You know in the case of Afterpay, after a year, its customers are doing 11 times as much repeat business in the Cohorts they study. After four years that goes up by 29 times. So this is clearly a means through which you can capture young consumers in particular, keep them on your platform and then the lifetime value of those customers increases dramatically.

So Square in looking at that is all about increased engagement across its ecosystem both its cash and its seller ecosystem. And this is one means through which they can really do that. And of course, this is on top of the fact that Square has increased engagement on its own platform by about 40% year over year, where customers are transacting 18 times per month now.

- And they see on the screen Square shares now up almost 8% in early trading. Mark, yesterday we also saw Square come out with its preannouncement of sorts three days early, four days early of its second quarter earnings. Curious how you saw the second quarter for the company beating on the bottom line, a little light on the top line what stood out in those results?

MARK PALMER: Well, I think it's important when you look at the top line to differentiate between the operating business and then the operating business revenues plus Bitcoin. And I think that the numbers when you include Bitcoin were a bit down relative to expectations, but the core business revenues were actually higher. And I think that's an important distinction.

Bitcoin revenues were down quite a bit relative to analyst expectations, we think that this has everything to do with the fact that some of the enthusiasm for Bitcoin in particular, crypto in general waned so much somewhat after we saw the severe pullback in crypto in the third week of May that then extended from that. So that's transitory, I mean what we saw is that Bitcoin generated about 55 million of gross profit for a Square during the quarter that's down from $75 million in the last quarter.

It's not something that is tremendously moving the needle for a company that is looking to do a run rate of about $4 billion of gross profit this year.

- Mark, you cover all the fun companies, I believe you also cover Coinbase here, from-- is there any read through on from what Squire had to say, down quarter over quarter in terms of Bitcoin revenues or crypto revenues. Any read through to what Coinbase my reporting a couple of days.

MARK PALMER: I think that there's an understanding. That volumes in the crypto space in general were down after the volatility that really picked up in the third week of May. And so there's an anticipation that even those Square-- I'm sorry coinbase is second quarter results will look quite strong. The impact of that pullback really affected the last part of the quarter the first couple of months were gangbusters-- for Coinbase.

You know I think what-- so I think that, that is baked in to a large extent there's an appreciation understanding

- A world of where those volumes are and those who follow Coinbase closely know, they can go online and track the company's volumes with some accuracy. So I don't think there are a lot of surprises. There.

- All right. We'll leave it there, Mark Palmer, managing director and analyst over at BTIG. Mark really appreciate you spending some time with us this morning. Thank you for jumping on.

MARK PALMER: Certainly.