OpenTrader’s Kieran Neeson: Some thoughts on APT-Square and ASX stock picks for the back end of 2021

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The news on Monday came as a surprise even to the most hardcore of Afterpay (ASX:APT) believers.

The $126 price offered by Jack Dorsey’s Square valued Afterpay at $39bn, a whopping 12,500% return for those early IPO investors who had bought APT at $1 back in 2016.

The merger will be an all-scrip deal, meaning that exisiting Afterpay shareholders will get a chance to swap their APT stocks for Square stocks, which will have a secondary listing on the ASX.

It will also mark the end for ASX darling Afterpay in its current form, as the company will be assimilated into the Square business helmed by the visionary but part-time CEO Dorsey, who doubles as the CEO of Twitter.

The price tag has raised eyebrows in some quarters, including those of TV personality Jim Cramer, but others have lauded the move.

To set things straight, Stockhead spoke to Opentrader sales manager Kieran Neeson, and get his thoughts on the matter.

Opentrader is a retail trading platform powered by Openmarkets, a company that provides the backend technology for both brokers and individuals to execute trades.

Neeson told Stockhead that the acquisition does makes sense from both sides’s perspectives.

For Afterpay, encroaching competition from global giants would make the sector too crowded to compete in, given its relatively small size.

“Paypal is on a mission to increase their market share in the space, and they’re 10x the size of Afterpay, broadly speaking,” Neeson told Stockhead.

“Apple is also launching its own buy-now-pay-later (BNPL) product called Apple Pay Later, which further increases competition in the sector.”

The merger, according to market analysts, will also help Afterpay increase its market penetration in the US, which currently sits at only 2.5% (14% in the ANZ).

But why did Square cough up so much just to get its hands on the BNPL market?

Some analysts said the deal for Square is not about BNPL per se, but more to do with leveraging Afterpay’s first-mover advantage.

Square is hoping this would bring Afterpay’s merchants into Square’s seller ecosystem, and convert Afterpay’s customers to use its CashApp platform.

So are we about to see more acquisitions within the BNPL space?

Neeson is of the view that the sector will see further consolidation.

“It’s really hard to see smaller players like Laybuy (ASX:LBY) or Openpay (ASX:OPY) gaining market share after seeing these big conglomerates flexing their muscles,” he said.

Neeson however thinks that Zip Co (ASX:Z1p) will be around as an independent company for a while.

“This is because Zip has a slight diversification in their product offering, and they position themselves in the market differently,” Neeson said.

Macro risks for the second half

Moving away from the BNPL sector, Neeson says the key catalyst for the second half globally will be inflation, and how rate policies would impact stock valuations.

“It’s not just about inflation as a topic, but the rates at which inflation will increase and how much they will affect the markets.”

Domestically the RBA has made it clear there are two catalysts that could affect its decision on interest rates –  inflation and wage growth.

Neeson says investors should focus on these two crucial economic data going into the tail end of the year.

Following its Board meeting yesterday, the RBA announced it will keep rates at current levels, but will push ahead with scaling back its $237 billion stimulus despite the latest lockdowns.

The central bank also upgraded its growth outlook for 2022 from 3.5% to 4%, and lowered its forecast jobless rate from 4.5% to 4.25%.

Stock recommendations

For the back end of the year, Neeson likes names such as A2 Milk (ASX:A2M) and Appen (ASX:APX), two stocks that lost half their values in 2021 and which he believes present a good buying opportunity.

The two companies have downgraded their earnings over the last 12 months due to a challenging macroeconomic environment, but Neeson reckons a lot of the negativity has already been baked into the prices.

“Appen is a good company within the artificial intelligence space, and they have clients such as Google and Amazon on their books.”

“There could be some significant upsides for these stocks.”

Fortescue (ASX:FMG) is also on Neeson’s watchlist, as the company runs a very high-margin iron ore extraction business, much higher than Rio Tinto’s (ASX:RIO) margins. Rio reported record dividends last week.

In smaller caps, Neeson likes the look of Magnis Energy Tech (ASX:MNS), a lithium-ion battery play which boasts a Nobel Prize winner, Michael Whittingham, as one of its non-executive directors.

Wittingham won the 2019 Nobel Prize in chemistry for his work in developing the lithium-ion battery.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

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