Afterpay Ltd (ASX: APT) has been one of the most polarising shares among professional and amateur investors alike.
But now that US fintech giant Square Inc (NYSE: SQ) is acquiring the Australian buy now, pay later business, one fund manager is revelling in his 'I told you so' glory.
Taking up about 11.5% of the portfolio, Afterpay is the largest holding in the Hyperion Australian Growth Companies Fund.
"Our thesis, that Afterpay is a misunderstood undervalued structural growth stock, was validated today with the proposed transaction with Square," said Hyperion Asset Management deputy investment officer Jason Orthman.
"We estimate that 65% to 70% of those under the age of 30 across Australia, UK and the US do not have a credit card."
This addressable market, in addition to more than 50 million estimated people that don't possess a credit rating in the US, is just waiting for Afterpay to conquer, he added.
The Square acquisition will provide Afterpay shareholders with $39 billion of the new parent's stocks. The deal is scheduled to finalise in about 6 months' time.
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Younger folks have no interest in old school products
Younger people, especially generation Z, prefer not to participate in "the traditional financial system", according to Orthman.
"High interest rates and revolving debt traps do not appeal to this generation as a result of having observed their parents suffer during the GFC," he said.
"Apps such as what Square provides and BNPL that Afterpay leads in, have become essential in allowing them to consume and transact outside the traditional finance system."
Orthman still has much faith in Afterpay, so is content with the stock deal.
"We would have been disappointed with a cash offer as we want to share in long-term upside," he said.
"While the premium on offer does not excite Hyperion, the structure of the deal to receive Square stock listed on the ASX as a CDI is compelling."
Square is also a nice stock to own
Orthman has great conviction in Square shares too, as revealed to The Motley Fool back in April.
It was Hyperion Gbl Growth Companies Fund (ASX: HYGG)'s second-highest holding at the time.
"We believe Square is also a misunderstood stock that Hyperion understands well and is what Afterpay was aspiring to evolve into over the next 5 years," he said Monday.
Orthman likes how Afterpay is going from essentially a single-product company to a parent with a large catalogue of services.
"Square offers consumer products across P2P, banking, stocks, bitcoin, and taxes," he said.
"Square's product set is broader and significantly more comprehensive when compared with Afterpay's. The Cash App was launched in 2013."
According to Hyperion, Afterpay has 16 million customers while Square has roughly 40 million monthly active users for Cash App and more than 70 million annually.
"In our view, this transaction is an upgrade in liquidity, valuation and quality," said Orthman.
"We believe this is a huge win for Hyperion investors and again validates the market inefficiencies Hyperion continues to exploit as business analysts and long-term holders."
