Square Trading Sharply Lower After Acquisition News

Square Inc. (SQ) is trading lower by nearly 5% in Monday’s pre-market after missing Q2 2021 revenue estimates and announcing the acquisition of Australian fintech provider Afterpay Ltd. for $29 billion. The San Francisco-based payment processor earned $0.66 per-share during the quarter, $0.35 better than expectations, while revenue rose 143.3% year-over-year to $4.68 billion, nearly $400 million lower than consensus.

Revenue Shortfall Sours Bullish Sentiment

The company hopes the Allpay acquisition will accelerate “strategic priorities for its Seller and Cash App ecosystems”. The all-stock deal is expected to close in the first quarter of calendar year 2022, indicating that a secondary offering will be needed to cover the purchase. Square predicts the transaction will be “accretive to gross profit growth with a modest decrease in Adjusted EBITDA markets expected in the first year after completion of the transaction”.

The sell-the-news reaction reveals shareholder anxiety about Square’s long-term growth trajectory. The acquisition will dilute current shares, requiring an equal uptick in income that isn’t guaranteed, given complex integration issues. Even so, the revenue shortfall is a bigger deal because, as PayPal, Inc. (PYPL) and Amazon.com Inc. (AMZN) underscored last week, 2020 COVID beneficiaries are having a harder time maintaining growth as quarterly metrics revert to historical norms.

Wall Street and Technical Outlook

Wall Street consensus stands at an ‘Overweight’ rating after 2020’s phenomenal 347% return, consisting of 24 ‘Buy’, 1 ‘Overweight’, 15 ‘Hold’, and 1 ‘Underweight’ recommendation. In addition, one analyst recommends that shareholders close positions and move to the sidelines. Price targets currently range from a low of $175 to a Street-high $380 while the stock is set to open Monday’s session more than $40 below the median $281 target. This humble placement suggests that Main Street is worried about post-COVID growth.

Square broke out above the 2018 high at 101.15 in June 2020 and took off in a powerful trend advance that posted an all-time high at 283.19 in February 2021. A rapid decline to 191 set the lower boundary of a trading range that has remained intact for the last five months. Price action has improved since a successful support test in May but the stock is now stuck near the dead center of the sideways pattern, likely months away from a sustained breakout or breakdown.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.