Why Block Analyst Thinks Company's Acquisition Of Afterpay Could Have Transformative Potential

Block Inc SQ completed the acquisition of "buy now pay later" specialist Afterpay in January. An analyst at KeyBanc Capital Markets sees the acquisition as imparting transformative potential.

The Block Analyst: Josh Beck maintained an Overweight rating on Block shares and increased the price target from $175 to $180. The analyst said he continues to recommend Block as a key idea.

The Block Thesis: The Block and Afterpay combo has an unusually large number of synergy categories, analyst Beck said. The industry-first deal spans two distinct consumer-merchant ecosystems, he added.

KeyBanc's analysis indicated a range of scenarios, resulting in a gross profit synergy run-rate of $0.8 billion to $5 billion, the analyst said. The low-end of the range would produce a 20% return on invested capital and more than 100% at the high end, he added.

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With the company issuing a positive update on its Cash App durability, the debate is shifting toward Block's ability to effectively stitch together consumer and merchant ecosystems, the analyst said. Afterpay's BNPL capabilities are a critical layer in defining the ecosystem growth potential, he added.

"Block is well-positioned to benefit from a shifting FinTech industry landscape that favors two-sided ecosystem synergies, BNPL-driven commerce, SuperApps and crypto optionality," KeyBanc said.

SQ Price Action: At last check, Block shares were rallying 6.47% to $142.31.

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Photo: Courtesy Afterpay