Afterpay (ASX:APT) share price set to tumble after Square's shares sink

Here's why Friday could be a red day for Afterpay…

| More on:
a man clasps his hand to his forehead as he looks down at his phone and grimaces with a pained expression on his face as he watches the Pilbara Minerals share price continue to fall

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Afterpay Ltd (ASX: APT) share price is likely to come under pressure on Friday.

This follows a negative reaction on Wall Street to the release of the third quarter results of Square, Inc (NYSE: SQ).

Why could the Afterpay share price tumble?

The Afterpay share price could tumble today after a pullback in the Square share price overnight following the release of its third quarter update.

As Square is acquiring Afterpay via an all-scrip deal, the value of the takeover price rises and falls with the Square share price.

Investors were selling Square shares in after-hours trade due to its revenue falling well short of analyst expectations during the quarter. Square's total net revenue came in at US$3.84 billion, down from US$4.68 billion in the second quarter and short of the analyst consensus estimate of US$4.48 billion.

Similarly, Square's adjusted EBITDA fell quarter on quarter to US$233 million from US$360 million.

What does this mean for the takeover?

At the time of writing, the Square share price is fetching US$235.80 in after-hours trade.

Afterpay and Square have agreed a deal that will see Afterpay shareholders receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay share they hold.

Based on the current Square share price and the latest exchange rates, this equates to a takeover price of $119.43.

This is actually lower than the Afterpay share price of $124.38 at the close of play on Thursday, which doesn't bode well for today's trading session. Particularly given how shares will often trade at a discount to the takeover price to account for uncertainties and such events like this.

Though, it is worth noting that after-hours trade often represents a bit of a knee jerk reaction from investors. There's always a chance that Square's shares could reverse these declines once the market reopens and brokers have fully digested the result.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and has recommended AFTERPAY T FPO and Square. The Motley Fool Australia owns shares of and has recommended AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Fallers

A young man clasps his hand to his head with his eyes closed and a pained expression on his face as he clasps a laptop computer in front of him, seemingly learning of bad news or a poor investment.
Share Fallers

Why Burgundy Diamond Mines, Clarity Pharmaceuticals, EML, and Zip are sinking today

These ASX shares are ending the week in the red. But why?

Read more »

A worried man holds his head and look at his computer.
Share Fallers

Why 29Metals, Brainchip, Platinum, and Premier Investments shares are falling today

These ASX shares are having a tough time on hump day.

Read more »

Man with his head in his head because of falling share price.
Share Fallers

Why 29Metals, Atlas Arteria, IDP Education, and Mineral Resources shares are falling

These ASX shares are having a tough time on Tuesday. But why?

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why ALS, EOS, NRW, and Patriot Battery Metals are dropping today

These ASX shares are starting the week in the red.

Read more »

A man looking at his laptop and thinking.
Technology Shares

Why are these ASX tech shares getting smashed today?

Owners of these two stocks are missing out today.

Read more »

a man weraing a suit sits nervously at his laptop computer biting into his clenched hand with nerves, and perhaps fear.
Share Fallers

Why AGL, Brickworks, IGO, and New Hope shares are dropping today

These ASX shares are having a poor session. But why?

Read more »

Frustrated stock trader screaming while looking at mobile phone, symbolising a falling share price.
Share Fallers

Why Amcor, Arafura, Brainchip, and South32 shares are tumbling today

These ASX shares are having a tough time on hump day. But why?

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Why Aussie Broadband, Liontown, Metals Acquisition, and Seek shares are falling

These ASX shares are having a poor session. But why?

Read more »