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Square to buy Afterpay in $29 billion all-stock deal

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On Sunday, announced plans to acquire Australia-based Afterpay as it taps into the ‘buy now, pay later’ space. The deal is valued at $29 billion and is expected to be paid in all-stock.

Video Transcript

MYLES UDLAND: Square announcing plans to buy Australian fintech company Afterpay a $29 billion all-stock deal. So this brings square, Brian Sozzi, into the buy now, pay later market, the BNPL market. And when I pull up Square's presentation, their investor presentation, on this deal, right at the top, what do we have? A big fat TAM, $10 trillion--

BRIAN SOZZI: Your favorite metric.

MYLES UDLAND: $10 trillion opportunity in online payments, and Square noting right at the top that by now, pay later only has 2% of that market. Initial thoughts on the deal?

BRIAN SOZZI: Wow. My initial thoughts is one, you're seeing Affirm shares, which is a rival to Afterpay, that stock last check on Yahoo Finance platform up to 7% in the premarket here. Also another reaction, this is bad for PayPal. You have Square continuing to make major power moves in April. They closed that deal on title, unclear how they expect to use that. But you make this type of deal for Afterpay, why are you also using PayPal?

You're likely to spend more time on this Square platform here. And if you're PayPal, you have to be worried about the insurgent that is now Square. Also Two, you look at Klarna. Klarna's last capital raise valued the company at $46 billion. But even still, does this deal put that company in play for a bigger target? Maybe a PayPal.

MYLES UDLAND: Maybe a PayPal, maybe one of those SPACs that are out there. We've heard a lot of SPACs looking to Europe, Klarna, of course, based in Sweden, looking to Europe for opportunities. Do you want to note as well, Visa, Mastercard, America Express, all those stocks slightly higher. I wouldn't say they're really moving that much on the news. But they are at least positive. They're not in the red.

And I think for me, Sozzi, as a consumer, my question around by now, pay later is where does it fit in to the basket of just how I'm buying any kind of goods? I have a debit card. I have a credit card. I mostly just write a check to the plumber or something. But that's still is available. And so where does buy now, pay later fit in to that basket?

BRIAN SOZZI: I think it focuses on the lower income consumer. This is this generation's, I would say, layaway program. But again, it will be interesting to see how this payment type evolves. I mean, this is not the only company doing it out. There it is Klarna. You have other companies doing it as well, and unclear how Square ultimately takes it to the next level.

MYLES UDLAND: And I think another thing with the buy now, pay later, the only time I ever used it, it was 0% financing for three months. I bought a Dyson vacuum, as I think we might have discussed here. And then I bought a product that I hope to unveil soon on this set, at your suggestion, at your behest, let's say.

BRIAN SOZZI: I won't mention it.

MYLES UDLAND: And buy now, pay later came up as an option, but it was, like, a 10% APR. And I said, well, I'll just put it on my credit card. And I'll just pay it off. And then I won't have to pay any fees on that. And so how are these businesses, as they pull more consumers into their sphere, every time you check out online now, there is an option. There's an Affirm option. There's an Afterpay option. There's a Klarna option, among others.

You can do versions of this through your credit card at Chase. I mean, they send me emails. Basically if I buy anything over $100, I get an email from Chase saying would you like buy now, pay later this specific item. And you wonder how much consumer behavior are they training at that 0%, that 5%, versus the 10%, 15%, where you're starting to really talk about a spread that starts to make money.

BRIAN SOZZI: And lost in this too-- and I get it, lots of focus on the Afterpay-- Square reported result, and we'll dive more into this later with Mark Palmer of BTIG, but I'm locked and loaded on what Square said about the crypto business.

Gross profit of $55 million in the second quarter, only 2% gross margin on that Bitcoin, Bitcoin sales and gross profit down quarter over quarter, which immediately has me concerned how did Coinbase do in its most recent quarter? We'll be hearing from them soon.

MYLES UDLAND: And we showed on the graphic there, just an interesting quarter from Square, in that they reported a top line that missed expectations. Haven't seen too many of those, Amazon, of course, one we discussed at length on Friday's program, but a slight miss here on the revenue line relative to expectations, profit coming in better than expected.

And just wanted to call something out that I found of interest, to me specifically, maybe not of interest to anybody else, but the way that Square talked about the Cash app, including particular metrics for its Cash app users around how to value stocks, basically, and the metrics, Brian Sozzi, that they called out as notable, revenue growth, fine, gross profit, and valuation metrics.

So I mean, in your view as a former analyst, are those the three kinds of things that you would like to look at before buying a stock?

BRIAN SOZZI: Love the disclosures. I think it's very, very important. Give me more granularity, Myles. And we're also too, two things quickly quickly to point out, they're also noting and what we mentioned on PayPal, they should be a little concerned what Square's putting up here. They note peer to peer transactions continue to increase, and that has been one of the largest drivers of their business.

Also stock trading is starting to take off for Square. Now, obviously this is not the same extent that you're seeing in a Robin Hood, but it is starting to gain some traction at the company.

MYLES UDLAND: And we always in the before times, when it wasn't about Cash app and it wasn't about Bitcoin, we did look at the size of the retailer using the Square tab or the Square checkout system by their size. And so we continue to see as a percentage of the overall gross processing volume, large customers, over $500,000 in annualized GPV gaining share within Square's ecosystems.

So they had about $40 billion, $38.8 in the latest quarter. Almost 14 was from sellers that have more than $500,000 in their platform, basically big sellers, not your tiny mom and pops. And that is now the largest segment, whereas previously that had been the smallest segment within the Square universe.

BRIAN SOZZI: Should I just close out my B of A account and use Square?

MYLES UDLAND: Square would like that. Square would like that.

BRIAN SOZZI: It seems really easy and fun. I don't know why. It's fun to spend money on Square, I guess.

MYLES UDLAND: There was an analyst not too long ago who said Square-- what did he say? It's like buying JP Morgan in 190-- was it, like, 1876?

BRIAN SOZZI: We don't talk about that analyst.

MYLES UDLAND: I'm just saying that they would say you could do that.