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Is Square’s Canadian push enough to save the stock?

Square (aka Block) is expanding its footprint into the Canadian buy now, pay later market through Afterpay. But is it enough to lift the languishing stock out of the doldrums?

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The US financial markets have not been kind to fintech stocks in 2022, so now sectors like buy now pay later (BNPL) are heading north.

Jack Dorsey’s payments company Square (aka Block) is making a Canadian push through Afterpay, its BNPL arm. Not to be outdone, BNPL rival Affirm Holdings is also growing its footprint in Canada and has expanded its partnership with eCommerce behemoth Amazon for the journey.

Nevertheless, investors continue to shun the stocks. Shares of Block and Affirm (AFRM) are down roughly 60 per cent and 80 per cent, respectively, year-to-date. Meanwhile, the BNPL market opportunity in Canada is vast, yet Wall Street analysts are a mixed bag.

Canadian merchants on Block’s platform will be able to offer Afterpay’s BNPL services to customers in hopes of capturing more sales. The payments company is hoping for the success it has experienced in the US markets to spill over to its neighbours to the north. Data analytics firm Research and Markets predicts Canada’s BNPL market will balloon by over 63 per cent this year for a value of $5.9bn, fueled by Gen Z and Millennial shoppers.

BNPL might be a feather in Block’s cap, but the company has its own share of problems, chief among which appears to be that it can’t get out of its own way. After changing its name from Square to Block at the end of last year—in a nod to all things blockchain and bitcoin—it has been all downhill for SQ stock. Meanwhile, analysts point to a disjointed product portfolio of Square, Cash App, and Afterpay. Wall Street is not letting Jack Dorsey forget it.

In recent weeks, Mizuho downgraded Block’s stock to a “neutral” rating, blaming:

  • “slower user penetration growth"

  • "plateauing inflows" 

  • "management’s preoccupation with bitcoin”  

New Constructs CEO and Wall Street veteran David Trainer is not impressed with Block's antics either, telling AltFi: “We do not think BNPL will be a source of value creation for SQ or any other firm. Same is true for bitcoin and most things crypto.” 

Meanwhile, Deutsche Bank sees a silver lining, describing Block’s Cash App Pay as the “potential sleeping giant." Functionality for Cash App Pay begins in Q1 2023, paving the way for the service to be used by businesses outside of Square and Afterpay's platforms.

Deutsche Bank analyst Bryan Keane has a "buy" rating on SQ and says it has held up "better than feared" in the face of macro headwinds. However, he also slashed his price target on the stock from $155 to $95, citing "lower peer group valuations."

BNPL is still very much an emerging market in Canada. Credit cards remain the preferred payment method among Canadians, but their share of the pie could get smaller.

According to a J.D. Power study, over one-third of Canadian consumers would consider different financing options for large purchases, 17 per cent of whom name BNPL as a possible alternative.

Will it be enough to lift SQ shares out of the doldrums? Time will tell. But for now, investors might want to hedge their bets.

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