August 1st Square (NYSE: SQ) announced the acquisition of leading innovator Buy Now, Pay Later (BNPL) After payment. The deal was immediately viewed as positive by Wall Street, as the stock prices of both fintech the pioneers jumped on the news. But while many investors are worried about the $ 29 billion price tag (at time of announcement), I think the move makes a lot of sense for Square from a strategic standpoint.
In fact, Afterpay has the ability to make Square even more unstoppable in the future.
Image source: Getty Images.
Transaction overview and motivation
Afterpay shareholders will receive 0.375 Square shares for each share held by BNPL. Square can also choose to pay 1% of the purchase price in cash. It’s not cheap, and Square shareholders can argue that the management team should have chosen to develop BNPL’s functionality in-house to serve its already huge user base of tens of millions of consumers and consumers. tradespeople. This is the route Pay Pal before deciding to buy the Japanese company BNPL Paydy for $ 2.9 billion.
But Afterpay immediately brings 16.2 million active individual accounts and nearly 100,000 merchants to Square’s platform. Afterpay’s gross merchant volume (GMV) and revenue grew 114% and 100%, respectively, in its 2021 fiscal year (which ended June 30). And its users become more and more active over time, completing almost 30 transactions per year for those who have been customers for four years or more. By acquiring Australian fintech, Square obtains a massive head start in a growing and popular market.
The deal is expected to close in the first quarter of calendar year 2022. And for investors, focusing on the strategic rationale, which I’ll talk about, should be the primary focus.
Expanding the addressable market
In a presentation to investors last December, Square’s management presented a total addressable market (TAM) of $ 100 billion for its seller ecosystem and $ 60 billion for Cash App. Sales of $ 15.9 billion over the past 12 months leave plenty of room to attack this revenue opportunity. With Afterpay now in its toolbox, Square’s TAM has certainly expanded. The global payments market is estimated at around $ 10 trillion, with BNPL now accounting for only 2% of the total.
Consider that over 85% of Square’s seller’s gross payment volume (GPV) comes from the United States, while Afterpay generates over half of its GMV outside of the United States, with a large portion, unsurprisingly. , from Australia (his country of origin). In addition to Square, 85% of Afterpay’s transaction volume is done online, while the San Francisco fintech produces around 45% of GPV in person. It’s clear that Afterpay’s international and e-commerce focus is driving Square’s domestic and in-store push.
Founder and CEO Jack Dorsey and his team pursued the deal to complete Square’s already impressive sequel offers of financial services. Integrating the Afterpay user base into the Seller and Cash App ecosystems would be a seamless transition. Consumers who are averse to credit checks and interest payments can turn to Afterpay’s solution as a legitimate shopping tool to discover and find their favorite brands. They want flexibility and transparency, while merchants appreciate higher conversion rates and basket sizes. For Square sellers, adding this ability can help grow their own business and increase revenue potential. And for Cash App customers, the BNPL payment option boosts a wide range of existing features such as sending money to others, direct deposit and buying shares and Bitcoin.
The overriding goal is to gain additional users and generate higher levels of engagement, and Afterpay will bring exactly that to Square’s growing platform. The rest of the fintech space should take this into account if they haven’t already – Square is a force to be reckoned with.
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Neil patel owns shares of Bitcoin and PayPal Holdings. The Motley Fool owns stock and recommends AFTERPAY T FPO, Bitcoin, PayPal Holdings and Square. The Motley Fool recommends the following options: $ 75 long calls in January 2022 to PayPal Holdings. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.