Afterpay and Square drop after Square’s Q3 earnings report

Although the US and Australia 200 markets are celebrating more gains this week after the Fed’s tapering commitment, APT-AU and its to-be new owner Block Inc is embracing a rough day after Square’s Q3 earnings report released on Thursday after market close.

After a disappointing Q3 report revealed with a glass dropping revenue fall nearing 20%, investors were rushing to sell off Square shares causing a 5% drop after market close. As Square is acquiring Afterpay via an all-scrip deal, the latter's value stays anchored to the rise and fall with Square's share price. As a result, Afterpay was dragged down by more than 4% in the ASX the next trading day.

But it's not all the bad news for Afterpay. Its merge with Square, Australia's largest-ever merger deal, was given the green light. Square Inc shareholders have approved the issuance of new shares for the digital payment giant’s $29 billion purchase of Afterpay. The BNPL sector's largest buyout is now only one step away from fruition.

Why?

Square’s total net revenue came in at US$3.84 billion, significantly short of the analyst consensus estimate of US$4.48 billion, and even further down from US$4.68 billion in the second quarter. Similarly, Square’s adjusted EBITDA fell to US$233 million from US$360 million in Q2.

Cooling in revenue from Bitcoin is the main reason for the big earnings miss: total revenue from Bitcoin increased 11% year on year to $1.81 billion, sharply lower than the 200% growth in Q2. Bitcoin high volatility has apparently proved to impose a material impact for Square’s business model and with little doubt will continue to do so, particularly as the group enters into Q4, with Bitcoin prices reaching fresh record highs.

As a stand out, Square's gross payment volume turns out to be the star for Q3. The metric tracks the total dollar amount of all card payments using the company's payments ecosystem, jumping by 43% compared to last year, to $1.13 billion. It’s not hard to see that a continued expansion for the digital payment giant’s looks pretty convincing, especially considering the addition of Afterpay in the near future. Also, a shift from its small business roots to more profitable mid-market is seemly on track.

Square's earnings results

^{Source: Predictions based off analyst consensus from Visible Alpha}

How is the buy-now-pay-later pioneer performed?

On August 2nd 2021, Australia’s buy-now-pay-later icon Afterpay announced a $39 billion takeover deal with US payment giant Square. The deal was agreed in a way that a fixed exchange ratio of 0.375 shares of Square where to be received by Afterpay shareholders for each share they hold. Given the green light from the shareholder of Square, the transaction is expected to complete through the first quarter of next year.

For many years, Afterpay Ltd (ASX: APT) is under the spotlight for its extraordinary performance, particularly in 2020, its share price has delivered jaw-dropping 15-fold growth from the low $8 in February to $117 by the end of the year, and further moving upward to its record high at $160 in February 2021. Since then, Afterpay has gone through some weak but quiet time until the takeover deal was announced.

The merger lifted the share price of Afterpay immediately due to the value-connection deal, but even since then the BNPL provider shares have traded largely flat. Even so, its share price is currently still up a mouth-watering 4000% over the past five-years at its current level of $118 a share (at time of writing).

Technical analysis

Based on the current Square share price and the latest exchange rates, the takeover price equates to $125. The current price between $117 to $125 will remain the major range to watch, given how shares often trade at a discount to the takeover price to account for the uncertainties. However, key market risks may trigger further movement, either from the Square side or the Afterpay side.

Purely from a technical standpoint, the momentum for Afterpay is more bearish, with the weekly RSI pointing downward and wondering near oversold territory. The candlestick was dropping out of the descending triangle and placed below all the key daily moving averages. The level at $115 may provide modest support for the near term, while a notable gap between $107 to $114 could see Afterpay shares drop further. On the upside, a resistance level joining 20-days SMA and 100-days SMA, around $121, could open a push higher but in a very tight margin as the restraints from Square share price stated before.

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