Anyone making a living as a stock prognosticator who is a fan of Block’s (NYSE:SQ) business model has been hammered over the past year by the implosion of SQ stock. I know I sure have.
I last wrote about this company in October 2021 when it was still known as Square. The fintech changed its name to Block back in early December to reflect all of its building blocks. That includes the Square commerce solutions it offers to businesses of all sizes.
At the time of my article, SQ stock was trading at $236. In the months since, it has lost more than 50% of its value. When I see that, I don’t know whether to laugh or cry.
On Feb. 2, PayPal (NASDAQ:PYPL) provided 2022 guidance that didn’t quite meet the Street’s expectations. Now, Block is expected to report its fourth-quarter 2021 results after the markets close on Feb. 24. Investors are expecting a similarly downbeat report. As a result, the share price has fallen more than 14% in the week since PayPal delivered dud guidance.
If the news on Feb. 24 is as expected, SQ shares could fall even further. The stock hasn’t traded under $100 since the pandemic began in early 2020.
Still, if I thought Block had the goods to be a long-term winner back at $236, I don’t see how I can argue anything else. It’s an outright steal under $100 per share. Here’s why.
SQ Stock Has Lost More Than 50% Since July
Back in October 2021, I highlighted three reasons why SQ stock was an excellent long-term hold. These were its organic growth, acquisitions and its TikTok partnership. Of the three however, I’ll focus the most on its $29 billion acquisition of Afterpay, an Australian buy-now-pay-later (BNBL) company.
Block officially completed its acquisition of Afterpay on Jan. 31, 2022. The company paid for the entire transaction in stock, with the acquired company’s shareholders receiving 0.375 shares of SQ for each share held in Afterpay.
At the time of the deal’s announcement in August, it valued Afterpay shares at 126.21 AUD ($90). SQ stock traded around $247, hence the 0.375 ratio.
Based on the issuance of approximately 117.4 million shares to Afterpay shareholders ($29 billion divided by $247), those shares are now worth around $12 billion. That’s considerably less than last August.
Former Afterpay Shareholders Believe It’s Worth Over $100
Fellow InvestorPlace contributor Mark Hake recently discussed why he thinks the Afterpay acquisition is good for Block’s business despite the transaction diluting existing shareholders by one-third. Hake used a share price of $122 or 238 million shares for the acquisition.
From everything I’ve seen — including the presentation in August — the 0.375 figure is a fixed exchange ratio. That means the calculation of shares issued would be based on the $247.26 share price used to calculate the exchange ratio.
Put another way, the transaction was valued at $29 billion as of July 30. That’s around 39.5 billion AUD. The transaction terms valued Afterpay’s shares at 126.21 AUD. That would mean it had some 312 million shares outstanding (39.5 billion AUD divided by 126.21 AUD per share).
Based on the fixed exchange ratio of 0.375, the Block shares issued work out to around 117 million. From where I sit, then, the dilution is closer to 25% than one-third (117 million divided by 462 million shares outstanding before the acquisition).
So, now you have former Afterpay shareholders owning roughly 20% of the company with absolutely no desire to sell their shares at a loss. You’ve got to believe they see SQ stock as worth more than $100.
The Bottom Line on Block
On Feb. 1, Square integrated Afterpay’s BNPL offering into its services. Now, eligible Square sellers can try Afterpay for free until May 10. Here’s what a Square customer had to say about the launch:
“Using Afterpay on our Square-powered website has been a huge boost to business […] Our purchases are nearly 20% larger when shoppers use Afterpay, and we receive earnings instantly in our Square account to keep our business moving.”
With Afterpay bringing more than 16 million consumers to the table who use its BNPL services offered by more than 100,000 merchants worldwide, it’s hard to imagine Square not benefiting from this acquisition. Further, Afterpay generates significant revenue outside of the U.S. and Canada. Meanwhile, Square has almost no business outside of North America.
This combination should be huge for SQ stock. As I see it, together they can capture the world.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
