Fintech giant Square (NYSE:SQ) has the industry buzzing with its acquisition of the top Australian buy now, pay later (BNPL) company Afterpay (OTCMKTS:AFTPY). Square will find it easier to scale its business and become an even bigger financial juggernaut with this acquisition. Moreover, its stellar earnings results suggest that there is still a massive growth runway ahead for SQ stock and its underlying business.
SQ stock has had a topsy turvy run at the stock market since the beginning of the year. It went as low as $191 per share and as high as $289 per share in early August. The stock is up more than 8% and seems to be building up decent momentum after several positive events. It currently trades at just 6.4 times forward sales which is reasonable considering its monstrous growth rates. Therefore, the stock is a buy at present levels for the long term.
Blowout Second Quarter Earnings
The Afterpay acquisition has overshadowed Square’s stellar second-quarter earnings. Once again, the quarter exhibited the strength of the company’s Seller and Cash App ecosystems. Revenues for the quarter shot up to $4.68 billion, including Bitcoin (CCC:BTC-USD) payment volumes, up 143% from the prior-year period. Even without factoring in Bitcoin payments, its net revenue of $1.96 billion rose 87% on a year-over-year basis. Another encouraging element is its subscription and services-based revenue, which nearly doubled to $685 million during the quarter.
Furthermore, the Seller and Cash App gross profit margins grew by 85% and 94%, respectively, from the same quarter last year. Its customers continue to find more value in the platform’s ecosystem and bring more funds into Cash App. Moreover, with the slowdown in operating expenses, the adjusted EBITDA was at a healthy $360 million, an improvement of 268% from the prior-year period.
Square has expressed caution on its short-term performance and did not publish full-year projections. It estimates a 212% year-over-year growth in gross profits for Cash App compared to the third quarter of 2020. On the flip side, it expects only a 12% gross profit increase for its Seller ecosystem. However, with the Covid 19 crisis improving, small businesses will continue to flourish, resulting in higher revenues on the seller side.
Square acquired Afterpay, which enables them to spread their tentacles into the blossoming BNPL market. It enables consumers to effectively manage their installments directly in Cash App and discover merchants and other BNPL activities. The company CFO, Amrita Ahuja, states that “The plan is for Square to integrate Afterpay into both its consumer Cash App, and its Seller product for small businesses.”
Hence, Square will be able to supercharge BNPL payment options, offering more flexibility for its consumers. Afterpay will be available on both Seller and Cash App ecosystems. Afterpay earns money on merchant fees and any late fees associated with missed payments. Therefore, it fosters a new revenue source for Square by offering an interest-free alternative to credit cards.
Afterpay already has 100,000 merchants serving over 16 million customers. The Cash App user base exceeds over 70 million and is likely to experience surge inactivity. Square estimates the global payments opportunity stands at $10 trillion, and BNPL’s penetration rate is just at 2%.
Bottomline On SQ Stock
Square has been killing it off-late with its foray into the BNPL space, its spectacular earnings, and the inception of its bank. These developments will enable the company to expand its customer base to new highs. Moreover, the acquisition of Afterpay will provide synergies and scale, which will boost both its Cash App and Seller platform. Therefore, SQ stock is certainly the pick of the fintech firms at this time, with an incredible future ahead.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
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