Square (NYSE:SQ) still looks undervalued, although not as much as it was when I wrote about in July. One reason might be that the company’s all-stock acquisition deal for Afterpay Limited (OTCMKTS:AFTPY) could dilute earnings. As a result, my estimate is that SQ stock is still undervalued, but not as much as before.

Despite what management presented about the company, Afterpay has made nothing but net income losses. This can be seen in the company’s own public documents, as it is listed on the Australian stock exchange.

The Afterpay Deal

For example, in the six months ending Dec. 31, 2020, Afterpay lost $76.5 million AUD ($55.5 million). At this rate, the company will lose $111 million annually for Square.

But on Aug. 24, the company announced that it had made a statutory loss of $159.4 million AUD ($115.7 million) for the year ending June 30. In addition, it made $38.7 million AUD ($28.1 million) in EBITDA.

Compare that to Square, which made $596 million in adjusted EBITDA for the half-year to June 30. In other words, Square made 21 times the adjusted EBITDA of Afterpay, which was just 4.7% of Square’s adjusted EBITDA.

But as of Aug. 1,  Square is going to pay for Afterpay with an implied $29 billion in SQ stock when the deal closes in the first quarter of 2022. Compare that to Square’s market value: $110 billion according to Yahoo! Finance, which uses Refinitiv data.

So why is Square giving up 26.36% pre-money and 20.9% post-money of its market value? This is for a company that makes less than 5% of Square’s own adjusted EBITDA.

The answer is that Square probably overpaid to get the deal done. Moreover, it is going to pay for 99% of the deal in stock, which will cause almost 21% dilution to SQ stock shareholders.

What Square Stock Is Now Worth

As a result, analysts have been lowering their estimates for Square. For example, in my prior article, I wrote that analysts’ projections for 2022 sales were $22.73 billion. But now, 35 analysts polled by Seeking Alpha have an average sales forecast of $21.48 billion for 2022. This is 5.5% lower than the original sales estimate.

As a result, the value for SQ stock will be lower. For example, in my last article, I used a price-to-sales (P/S) multiple of 6.3 to value the stock. This was based on a discounted comparison with PayPal (NASDAQ:PYPL) and its P/S metric.

That puts Square on a target market value of $135.3 billion. This is 23% more than today’s $110 billion market capitalization. Therefore, based on its Oct. 1 price of $239.29, the implied price target for SQ stock is $294.33 per share.

This is 6.4% below my prior target price of $314.55. But that might be expected, given analysts’ lower sales estimates.

What to Do With SQ Stock

My target price of $294.33 is slightly lower than most other analysts. Maybe I am being too cynical about the Afterpay deal. Most other analysts see the deal as a positive, despite the lack of real profits. But I used market forecasts for sales and applied a reasonable P/S multiple.

For example, Seeking Alpha indicates its survey of 19 analysts has an average price target of $296.84, which is close to my $294 target. However, both Yahoo! Finance and TipRanks have higher average price targets. As of Oct. 1, these were $303.17 and $313.38 per share, respectively. The latter implies a potential gain of more than 31% in SQ stock compared to my forecast of a 23% gain.

Therefore, investors might be willing to take a new position or add to old positions in SQ stock. This is despite the potential dilution that could occur with the Afterpay all-stock deal.

On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.