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Square to acquire Afterpay in $29B all-stock deal

Square is acquiring Afterpay in a $29 billion all-stock deal. Wedbush Analyst Moshe Katri joins Yahoo Finance Live to discuss.

Video transcript

- Let's turn our attention to a big mover in the market today. Shares of Square soaring in this session on news the company is acquiring Australian fintech player Afterpay. You see the stock there up more than 10%. It does come with a steep price tag, though. The $29 billion all-stock deal is a 30% premium to Afterpay's last closing price, but it does give Square a larger foothold into the company's second largest market.

Let's bring in Moshe Katri. He is Wedbush analyst. Moshe, it's good to talk to you today. You know, this is certainly a huge deal, acquisition when we have seen explosive growth in this buy now, pay later space. Walk me through what you think this means for Square as they look to expand their services.

MOSHE KATRI: You have to put this in perspective of the overall strategy that we're seeing out there. And it's all about monetization. Square has a two-sided platform, one that caters to merchants. The other one caters to customers.

In terms of strategic rationale, this is a transaction that significantly expands the number of active users on the consumer side of the business. Square has about 40 million active users on their Cash App. Afterpay, I think, brings in about 60 million. So that kind of more than doubles it. And then on the flip side of it, Square has what they call millions of merchants that they cater to, and then Afterpay brings in about 100,000 incremental merchants.

So hypothetically, you have more access to merchants and consumers. Hypothetically, you have more access to, in terms of regional expansion, outside the US. Today, 85% of revenues are generated for Square from the US. And then ultimately, it's all about the RPU, revenue per user. So that's kind of the strategic rationale.

And you also have to put this in perspective in terms of what happens competitively compared to some of the other players in the ecosystem. PayPal introduced BNPL, buy now, pay later, six to nine months ago. They're getting a lot of traction on that part of the business. Apple Pay introduced that a couple weeks ago.

This is not necessarily a new product out there. This is just another way for you to provide more services within your ecosystem, targeting both merchants and consumers. The price tag is pretty hefty. And that's probably one of the negatives in the story. But if they can make it work, ultimately, you'll get some of that accretion that the company is talking about, both in terms of revenue growth and profitability.

- Yeah, the price tag probably giving a boost here to Affirm shares, as well, one of those other companies that is in the buy now, pay later space. And you know, people might be watching it. And to your point about how much they're paying for, I mean, talk to me about how it maybe tweaks their competitive nature on a global stage here against the likes PayPal, other processors out there, other payment platforms out there that have been kind of leaning into that--

MOSHE KATRI: Yeah, I think that--

- --and what it does for Square now.

MOSHE KATRI: Yeah, the timing is kind of interesting, especially given the fact that PayPal launched their Zettle product in the US a couple weeks ago. This is a product that will compete head-to-head in-store against Square. So it just feels that Square is kind of filling in all the blanks, just to make sure that they're a bit more competitive.

What's also interesting is that PayPal decided to do this organically. They're pretty innovative. I think some of the-- one of the questions that came out today on the call was why did you decide to go ahead and buy this versus kind of build this organically. And I think it's a bet that Jack Dorsey is kind of making in terms of getting there quicker, rather than doing this organically. So I think, at this point, that's really the rationale for going out there and paying, I don't know, 30, 40 times revenues for a company that generates-- will be generating about $700 million this year.

- With that said, we've heard Square talk about this potential, especially in trying to tap into a younger market, where they have said consumers are seeking a little more transparency, maybe going for the buy now, pay later option instead of going through the traditional credit cards. When you look at this market overall, how much of that right now-- of the potential has already been tapped? How much runway do you think there is when you consider how many competitors are in the space already?

MOSHE KATRI: Yeah, Square will tell you that there-- you know, at this point, only 2% of the market is tapped. So I'm not-- I'm not that worried about the competitive landscape. From my perspective, it's more about the ecosystem. Square today can offer you-- I mean, this is really a digital banking product with a BNPL option, if you think about that.

PayPal is headed that way. Stripe is headed that way. Stripe is publicly trade-- privately held. So I think, ultimately, you'll have five competitors that have a digital banking app or the super app that people are going to be focusing on. And I think Square's up there, and a bunch of people out there are-- a bunch of other players are there, as well.

In terms of the potential, in terms of opportunity, it's pretty large out there in terms of the growth, potential growth coming out in BNPL. But again, BNPL is part of the entire ecosystem of other things that are being offered and-- you know, from all these companies.

- Yeah, well the competition there just got a little bit more intense, with a $29 billion surprise deal here to kick us off this week. Very interesting. Moshe Katri, though, Wedbush analyst, appreciate you talking with us today off that. Be well.