Fresh off Square Inc.’s worst trading day on record, investors are now looking at “the most compelling entry point in the stock in over three years,” according to an analyst.
Cowen & Co.’s George Mihalos upgraded Square’s stock SQ, 5.403% to outperform from market perform Tuesday, writing that things will most likely get worse before they get better for the payment processor due to the impacts of COVID-19, the disease brought on by the novel coronavirus, on U.S. small businesses. That said, he thinks Square’s shares finally look attractively valued after a selloff that sent the stock down 28.6% in Monday trading alone.
“To be clear, with the stock levered to US discretionary spending – over 40% of revenue is sourced from restaurants and retail – we would expect material near-term (2Q/3Q) negative impacts to revenue and adjusted EBITDA,” Mihalos wrote. “In fact…we believe negative 2020 revenue and adjusted EBITDA revisions between 8 to 12% and 40 to 60%, respectively, are possible, depending on the severity of a likely U.S. consumer spending slowdown.”
Still, the analyst is upbeat about the company’s long-term potential, arguing that the company should be able to post 25% revenue growth in 2021 and 2022 while delivering “significant margin expansion.” He is also “confident” in the company’s liquidity position due to its more than $2 billion in cash and its free-cash-flow generation.
“We believe downside is limited at the current price and see upwards of 50% upside,” wrote Mihalos, who cut his price target to $70 from $82 in conjunction with the upgrade.