Evercore ISI Upgrades Square's Stock, Says Valuation Is 'Fair & Square'

Square Inc SQ shares are down more than 52% in the past month, but the stock got a much-needed Wall Street upgrade on Monday.

The Square Analyst

Evercore ISI analyst Rayna Kumar upgraded Square from Underperform to In Line, but cut her price target from $57 to $39.

The Square Thesis

Kumar said Square shares have fallen so far from their peak price that they're no longer overvalued.

“Our revenue & EPS estimates and PT now reflect our Base Case Scenario, which assumes that SQ’s GPV growth is 13%, or half of the growth we believe is implied at the high end of SQ’s current 2020 financial outlook,” Kumar wrote in a note.

She said Square’s biggest risk during a potential U.S. recession is its high exposure to small and medium-sized businesses, many of which are restaurants and bars. Roughly 45% of Square’s gross payment volume comes from businesses with annual volumes of under $125,000. Kumar said that during the Great Recession in 2008 and 2009, roughly 5% of U.S. businesses with less than 500 employees disappeared.

See Also: Jack Dorsey's Cash App Gives Away Funds To Users During Coronavirus Pandemic

In a base-case scenario, Kumar is projecting 30% Cash App user growth in 2020, a 2.8% take rate and a 1.0% decline in adjusted EBITDA margins. If the impact of COVID-19 is milder than anticipated, the firm has a $48 bull case target. If it is worse, Evercore has a $28 bear case target.

The upgrade comes less than a week after Square announced the FDIC conditionally approved the company’s application for an Industrial Loan Company charter. The approval allows Square to offer a wide range of new financial services to small businesses and consumers, such as loans and deposits.

Bullish sentiment among StockTwits messages mentioning Square was at 70.7% on Monday, down from 97.8% on Feb. 2.

Benzinga’s Take

The coronavirus outbreak seemingly hasn’t changed much about Square’s long-term business outlook. The major questions for investors in the near-term is how much of Square’s current customer base will be impacted by the economic downturn and how much of that impact is already priced into Square shares.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

Photo credit: Mybloodtypeiscoffee, via Wikimedia Commons