Risk/Reward Rating: Negative

Square pulled out all the stops in announcing its second quarter earnings five days earlier than scheduled in a surprise Sunday press release. The surprise earnings release was accompanied by a large acquisition announcement. The company announced it was buying Afterpay for $29 billion in an all-stock deal, valuing Afterpay at an extraordinary 42x sales and 492x EBITDA (earnings before interest taxes depreciation and amortization). It should be noted that Afterpay was not profitable in 2020 on a GAAP basis (generally accepted accounting principles). The company offers a buy now, pay later (BNPL) app that has gained some market traction in recent years and saw big gains during the COVID pandemic.

It should be noted that paying such a historically extreme valuation for a business has traditionally been a red flag in the stock market.

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