Square Lands 2 Upgrades Following Afterpay Buyout

Square Inc SQ shares traded lower on Tuesday, pulling back just a bit following a 12% surge in Monday's session.

The Analysts: Raymond James analyst John Davis upgraded Square from Underperform to Market Perform.

Cowen analyst George Mihalos upgraded Square from Market Perform to Outperform and raised his price target from $266 to $343.

The Theses: The upgrades come after Square announced a $29 billion all-stock buyout of Australian buy now, pay later company Afterpay on Sunday evening. Square said Afterpay is part of its strategy to beef up its installment loans business given trends among younger users away from traditional credit.

Mihalos said Square was a best-in-breed digital payments stock even prior to the Afterpay deal. Now, he says Square should have no problem generating pro-forma gross profit growth of more than 30%.

“The addition of APT.AX at this stage looks to us like a 1+1=3 scenario, accelerating Seller gross profit growth above the low 20% rate we’ve forecasted through 2023 and furthering Cash App user monetization, creating a greater halo effect across both segments,” Mihalos wrote in a note.

See Also: Shorts Get Slammed After Square Stock Skyrockets On Q2 Earnings, Afterpay Acquisition

Davis isn’t quite so bullish on the Afterpay deal and said he has longer-term concerns about the buy now, pay later market.

“In short, we think this is a high risk/high reward acquisition with significant execution risk, but given SQ's track record to date, believe the bull thesis will be difficult to disprove over the near to medium term,” Davis wrote.

Davis said Square’s second-quarter numbers were impressive, but upside may be limited with the stock trading at 129.4 times forward earnings.

Benzinga’s Take: For years, Square has consistently made all the right moves when it comes to innovation and growth, so it’s difficult to question the Afterpay buyout, even at a steep $29 billion price tag.

The big questions for long-term Square investors are when will the company’s growth numbers finally start to slow and how much of an impact could that have on the stock price?