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Square to Buy Credit Karma Tax for $50 Million, Expanding Reach

Credit Karma Tax, which provides a free do-it-yourself tax-filing service, is set to become part of Square’s Cash App unit.
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Square  (SQ) - Get Square, Inc. Class A Report shares rose Wednesday after the payments company said it’s buying Credit Karma’s tax unit for $50 million cash.

Credit Karma Tax, which provides a free do-it-yourself tax-filing service, will go into Square’s Cash App unit. 

Cash App enables customers to transfer money, pay for goods and services, invest in stocks, and buy and sell bitcoin. The division has grown sharply in recent quarters.

“The acquisition provides an opportunity to further digitize and simplify the tax-filing process in the U.S., expanding access to the one in three households which are unbanked or underbanked,” Square said in a statement.

The deal came after the Justice Department required Intuit  (INTU) - Get Intuit Inc. Report to sell Credit Karma’s tax business if it wants clearance for its $7.1 billion purchase of Credit Karma, a free credit and financial management platform. 

Intuit is the Mountain View, Calif., financial-management-solutions provider.

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Shares of Square, San Francisco, recently traded at $212.81, up 4.9%. They have well more than tripled year to date. 

Intuit traded at $349.11, up 1.1%. The shares have climbed 34% year to date.

Morningstar analyst Brett Horn likes Square but says the stock is overvalued. 

“Narrow-moat Square generated good growth in the third quarter, despite the pandemic,” he wrote after the company’s earnings report earlier this month.

“We are particularly impressed with the performance of the Cash App platform, and after reviewing our assumptions, we’re raising our fair value estimate to $78 from $64.”

Further, “we would reiterate our very high uncertainty rating and think that Square, as a high-growth company with a highly scalable business model, faces a potentially wide range of long-term outcomes. … The current market price reflects an overly optimistic scenario,” Horn said.