SQ announced the issuance of Square Class A common stock (including the shares underlying CHESS Depositary Interests) (New Square Shares) to Afterpay shareholders as contemplated by the Scheme Implementation Deed.

Afterpay expects the transaction will close in the first quarter of 2022.

As our Strawman said on the Motley Fool Money podcast a few weeks back, if you are looking at APT then you really have to have an opinion of Square, because the APT business will only be around 20% of what you own once they merge.

Andrew Eisen interviewed on Ausbiz.

His explanation of Afterpays mojo and how it fits with SQ is fantastic.

Afterpay's future is a fusion of payments, commerce and finance to serve the next gen on ausbiz

I watched it 3 times, APT is my largest position and I hold SQ. 

The shareprice movements from here are just a mirror of SQ, so the results for APT only have an impact in so far as they may move the SQ results…

APT will merge with Square (SQ on the NASDAQ) sometime Q1 calendar 2022, at 0.375 Square shares for each APT valued at US$29b (A$39b).  APT founders Anthony Eisen and Nick Molnar will join Square running Afterpay business which will be integrated into Squares Seller (merchant focus) and Cash app (Consumer focus) businesses, forming a stronger connection between their two ecosystems.

This expands Afterpays consumer base from 16m to 70m active Cash App customers and expands Afterpays merchant base (98k) with millions of square sellers. 

APT is my largest RL position and I also own SQ and would be happy to own more.  My initial take on the headline of APT being sold for A$39b was it was opportunistic and way undervalued, but on looking at the announcement detail and that it is with SQ, I couldn’t think of a better partner – a bit like when they merged with Touch to become Afterpay Touch.

With the entry of Paypal and Apple Pay, APT was in danger of being trodden on, despite a great lead and strong product value proposition.  By teaming up with SQ it immediately achieves the scale and strength it needs to take Paypal and Apple Pay on.  The game has stepped up to a new level and APT is stepping up to meet the challenge, Anthony and Nick continue to impress!

I am not sure what is happening with a possible ASX listing of SQ shares for what is a large Australian shareholder base, but expect that this will be accommodated - TBA.

FY21 Update (attached):

The exciting news of the merger may leave sensational FY21 figures almost un-noticed, so here are the key points (note they had unfavourable FX impacts, I am interested in the underlying business so will quote variances at constant currency):

·         Underlying Sales: 22.4b +102%, the mature ANZ market was a drag with “only” 44% growth, North America had 177% growth and Clearpay (UK+EU) had 242% growth.  I was looking for 100% growth and they just beat it.

·         Merchant Revenue: 875m, which gives a 3.9% revenue to merchant sales which is consistent with prior year and shows merchant margins are being maintained (despite constant bear cases that they are too high and will fall).

·         Active Customers: 16.2m +63% YoY, North America growth of 88% now makes it about 2/3 of customers.  ANZ only grew 8% due to maturity.  Note that underlying sales growth is much stronger than customer growth which tells us that existing customers are spending more (93% of FY21 underlying sales are from repeat customers).  These will also be the better-quality customers with proven history, so credit quality will have improved.

·         Gross loss is expected below 1% (inline with FY20) but lower contribution from late fees mean net Transaction Losses are expected to be slightly above FY20.

·         Active Merchants: 98.2k +77% YoY, North America growth of 148%, ANZ +47% and Clearpay +501%.  Merchants are still seeing value in having it or can’t operate without it.

I maintain my valuation of A$221.91 based on this update, but it looks like this stand-alone valuation is now irrelevant.  Square is a great business and looks to be a good fit with Afterpay, I plan to hold but may trim given portfolio weightings, but in no rush.  It is a little disappointing to see the Australian hero that APT is being absorbed by a US company, but I think we can continue to be proud of it’s success as part of a bigger Square

Announcement today (attached) that ‘Money by Afterpay’ is scheduled for launch in October and some more details on what it will be.  The collaboration with Westpac to offer this product was announced 10 months ago, so what is interesting is the detail:

Good:

·         On brand product that focuses on customer benefit and helping with cash management as well as offer a very good 1% interest payment on deposits (which I assume it can then use to offset higher cost funding for their BNPL product).

·         APT has now got a AFSL which offers more opportunities to promote deposit product and debit cards.

·         Eco-system expansion: the offer is not likely to generate revenue directly but makes customers stickier and per the screen shots offers more opportunities to promote products for their merchant, enhancing the offer.

Not So Good:

·         This is just in Australia, given much of APT’s valuation is predicated on US and EUR market opportunities, this does little to add significant value.  However this may the testing ground before offering this type of feature in the US and EUR.

·         Risk that by offering a “Banking” product that it’s brand attraction as being different to the banks may loose some shine.

A good development, I trust management based on track record maintain brand credibility to consumers and value to merchants.  I expect this will be a test cast for expanding a similar offerings in overseas markets, which is the APT play book, and once that happens it will enhance value. No change to valuation based on this alone.

I hold APT as my largest real world position and expect this to continue (despite Apple and Paypay joining the party)

Andrew covered the key points announced in today’s Q3 Business Update (20/4/21), but much of the variance announced was YoY not QoQ, which can be more revealing.  I test the assumption in my previous valuation considering QoQ (new detail format attached):

·         Q3 GMV of $5.2b ($5.7b constant currency) is down from Q2 GMV of $5.7b, but this does not indicate growth has stalled. Last year the same thing happened, Q3 was 10% lower than Q2 – it’s seasonal.  Last year Q4 was up 50% on Q3 and I expect a similarly strong Q4 rebound given the quarter growth in customer (14.6m from 13.1m in Q2) and Merchants (85.8k from 74.7k in Q2).

·         My full year GMV target of $22.6b is still achievable based on prior year performance, also note that the US has taken the lead as the largest market for APT and has actually grown Q3 Vs Q2, so we see acceleration in it’s largest market opportunity.

·         Clearpay launched across Spain, France and Italy in March (Germany to follow), so in Q4 we will start seeing ex-UK Europe sales ($494b e-commerce market).

·         Margins and credit losses remain consistent with Merchant revenue margins are in line and so are Gross Losses, so no need to revisit margin or loss assumptions.

·         Product development such as the Afterpay Card in Australia (28 March launch), Squarespace partnership (live) and Afterpay Money (in development) progressing to maintain APT’s lead.

·         Regulatory engagement in ANZ and UK progressing constructively, still a threat but has been managed well to date.

·         The potential US listing is new news but not a surprise – a positive if any influence on price.

I don’t see any material change to growth, margins or credit loss assumption so will leave my valuation as is.  APT seem to be continue to deliver and I remain a very happy shareholder