Afterpay Ltd (ASX: APT) shareholders had an enviable dilemma after the blockbuster Square Inc (NYSE: SQ) acquisition was announced last week.
Sell or hold?
Do you cash in your profits and not take the risk of owning a US fintech? Do you hold on for further growth within the Square family?
Frazis Capital Partners portfolio manager Michael Frazis has been a fan of both companies for a long time.
His fund was known to have held both, with Frazis loving the "customer love" of Afterpay and Square's journey of creating a "closed loop" payment ecosystem.
But he had a surprise for his clients in a video update on Friday.
"We sold our Afterpay shares," Frazis said.
"We sold after the acquisition announcement."
Why Frazis sold all his Afterpay shares
Why did Frazis' fund sell off all its Afterpay stock?
It's because it already holds Square shares, and the team felt like it took up enough of the portfolio.
"We owned about 6% in Square, which is one of our largest positions," Frazis said.
"We're going to maintain 6% or 7% in Square — the combined Square-Afterpay company — which we think is about right."
Afterpay shares went as high as $160.05 in February. But the fact that it was sold to Square at about the equivalent of $126 says a lot, according to Frazis.
"It's a full valuation… It gives you an indication of [co-founders] Nick Molnar and Anthony Eisen's idea of where the value lies in buy now, pay later," he said.
"They basically invented the sector. They made it what it was… So if they're selling out at a certain price, it gives you a good indication of where they think the market is."
Frazis did say "selling out" might be too harsh, as both executives will stay on and receive a large amount of Square shares rather than cash.
Square on its way to 'The Holy Grail'
He added that Afterpay would take Square another step closer to creating the "holy grail" of payments where the entire end-to-end payment process takes place within its ecosystem.
"If you can get customers buying things off merchants off your app, off your platform… you don't have to go through the [incumbent] payment system, which is this whole byzantine archaic thing," Frazis said.
"You have to pay all these different people, from Visa, Mastercard and so on, and switches. It's horrible technology."
In return for a terrible system, the incumbent middle men take a large margin out of every transaction between merchant and customer.
"Even today, if you set up an online store you can be paying 2%, 3%, 4% of transaction fees, which is crazy."
He remembered in the early days of Afterpay the sceptics wondering why retailers would want to hand over 4% commission to the buy now, pay later provider.
"Then the data came out that showed there was increasing their basket size. That was a light bulb moment," Frazis said.
"That was really the key to their success. It was being able to demonstrate value to merchants."
