From $2.51 to $128 in four years

When we first started covering Afterpay, in May 2017, the stock was $2.51, with a total market cap of $450m, net cash of $21m. The Square Inc bid, announced on Monday, is worth $40bn and Afterpay’s price is now over $128. That’s some value creation in just over four years!

The Afterpay journey: from small cap to mega cap

Here our resident fund manager The Idle Speculator, analyses the deal.

Back in 2017 Afterpay was in the middle of its merger with Touchpay, and we did not recognise the full scale of its potential growth. Then again, neither did anyone else, which possibly includes the founders. No one was covering the stock and we discovered it through doing a sector analysis on the nascent fintech industry. Touchpay was better known.

This story is a one-off wonder, and subscribers who took the plunge only a few years ago, when we first started looking at the Buy Now Pay Later sector, will be sitting pretty.

Taking Profits on the way up

We last covered APT last July, when the market cap was $21bn, and the share price was $75.  We had been taking profits all the way up, and again we recommended that investors follow the founders lead, take some risk off the table if they hadn't already done so, but keep some skin in the game.  A useful reminder about our Take Profits recommendation, it is not an outright Sell. Where a stock has done incredibly well like APT, Take Profits will mean very different things to different people. By now, any investment should entirely house money for any of our subscribers.

A done deal

We think this is effectively a done deal.  Square Inc (NYSE:SQ) traded up 11% on well over US$10bn of trading volume on the deal announcement, and is within a smidge of its all-time high of US$283 in February.  Holders will get 0.375 SQ shares for each APT share.  SQ apparently sells on a multiple of 165 times forecast earnings, but its recent second quarter revenue substantially beat estimates.  Afterpay shareholders will get stock in an impossible to value high growth US giant, in return for their current stock in an impossible to value high growth market leading niche provider.  To the extent that your investment is diversified, but still hitched to a high growth future, this is a positive deal.

Disruptive technology producing spectacular results

The merger plays into the narrative of disruptive technology producing spectacular results.  The deal is intended to make the most of both company’s assets and customer bases.  Future moves in the stock will be largely driven by sentiment towards the group of listed technology and cloud stocks dominating global conversation.  If gross earnings are growing at 100% year, that will ultimately deliver value.  International possibilities are interesting.  But a good part of Square’s consumer business is currently bitcoin trading related.

What do we think now?

We continue to recommend investors exercise some caution.  The risk is a perceived advantage being competed away, or margins depressed through regulatory actions or other changes in the business structure.  There are those who will argue that these are networks, and the old rules don’t apply.  Certainly, in this pandemic boom, until the music stops, as the fateful saying goes, you have got to keep on dancing, or get out of the kitchen. TIS.