Here is your Pro Recap of the top takeaways from Wall Street analysts for the past week: a downgrade at Block, an upgrade for Chewy, an Underperform initiation for Cloudflare and an Overweight initiation for Surf Air Mobility
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Block Inc. cut to Neutral at UBS
What happened? On Tuesday, UBS downgraded Block (NYSE:SQ) to Neutral with a $65 price target.
What’s the full story? UBS analysts are cautious on Block, the fintech company formerly known as Square, as they expect its gross profit growth to slow down in the second half of 2023 and 2024.
UBS attributes the slowdown to the weakening of consumer discretionary spending, the deceleration of Cash App monthly active user growth, and the moderation of Cash App monetization rates. UBS analysts also noted that Block has been improving its profitability and is beating quarterly expectations on adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), but they think investors are more concerned about Block’s gross profit growth potential. The analysts cited the 14% drop in Block’s shares after it reported strong adjusted EBITDA but guided for lower gross profit growth for the second half of 2023.
UBS does not see any catalysts that could reaccelerate Block’s gross profit growth in the near term, and they see limited upside potential for the stock. However, the analysts also point out that Block’s shares are trading near a five-year low multiple in enterprise value to gross profit (EV/GR) - 4x - which suggests that the market has already priced in the potential for slower gross profit growth next year.
Neutral at UBS means “FSR [forecast stock return] is between -6% and 6% of the MRA [market return assumption]."
How did the stock react? Shares slid on the premarket circulation of the note around 4:05am in New York, trading down to the lower $57 handle. Block ended the regular session Tuesday at $58.74, up about 1%.
Chewy Inc. upped to Buy at Argus Research
What happened? On Wednesday, Argus Research upgraded Chewy (NYSE:CHWY) to Buy with a $30 price target.
What’s the full story? Argus analysts are bullish on Chewy, the online retailer of pet food and related products, and have upgraded their rating to Buy with a $30 target price.
The analysts think that Chewy has gained market share in the pet category thanks to its customer service and focus on nondiscretionary pet products and services, which account for over 80% of its revenue. The analysts also like the recurring sales from its autoship service, which provides predictable income and operational efficiency. Argus analysts note that Chewy has grown its revenue by nearly three times, to $10 billion, since its initial public offering (IPO) in 2019; that it has improved its gross margin by 800 basis points, to 28%; and that its adjusted EBITDA margin has climbed by nearly 1,000 basis points. The company also posted earnings for the first time in fiscal 2023.
Argus acknowledges that Chewy may face some headwinds from weak economic conditions and high investment spending in the near term, but they expect its expansion into higher-margin products and services, where the company has been gaining market share, to offset the pressure on earnings. The analysts believe that the recent pullback in the shares offers a buying opportunity, and they see a potential return of about 20% for the stock.
Buy at Argus means the following:
“A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Market Strategist.”
How did the stock react? Shares spiked on the open to $25.46 then remained under downside pressure all day until the close. Share ended the day at $24.42, up a penny from the prior close.
Cloudflare gets new Underperform rating at BofA
What happened? On Thursday, BofA started Cloudflare (NYSE:NET) at Underperform with a $52 price target.
What’s the full story? BofA analysts are skeptical about Cloudflare, a company that provides web delivery, security, and edge computing services. The analysts think Cloudflare’s offering breadth is too wide and shallow, and that it lacks depth and focus in some of the new areas that it is targeting, such as the enterprise market.
BofA’s analysts also doubt Cloudflare’s ambitious growth targets for its Zero Trust and Edge Compute products, which imply a 59% compound annual growth rate (CAGR) for the next three years. BofA suspects that this could be too high given the potential mismatch between Cloudflare’s technology offering and its target customers. BofA appears more conservative and models a 42% CAGR for Cloudflare’s new product revenue, resulting in a $1.6B estimate for 2027, compared with Cloudflare’s target of $2.5B.
Underperform at BofA means the following: “Underperform stocks are the least attractive stocks in a coverage cluster.”
How did the stock react? After word of the Underperform rating in the premarket session, shares promptly sold lower by $2 to $62 over a nine-minute period. Cloudflare ended Wednesday’s regular session at $63.53, down 0.7%.
Surf Air Mobility started at Overweight at Piper Sandler
What happened? On Friday, Piper Sandler initiated coverage on Surf Air Mobility (NYSE:SRFM) at Overweight with a $4 price target.
What’s the full story? Piper analysts are bullish on Surf Air, a commuter airline that operates in the U.S. Piper believes Surf Air has become the largest player in the niche market of commuter air travel following the company's acquisition of Southern Airways last month.
Piper’s analysts also believe that Surf Air has a competitive advantage in using existing underutilized airfields and Cessna aircraft, which lower its operating costs and increase its accessibility. The analysts are optimistic about Surf Air’s plans to introduce hybrid or fully electric retrofits for its airframes, which are poised to reduce the company's carbon footprint and fuel expenses.
Piper sees Surf Air as a leader in the emerging segment of commuter air mobility, which is poised for growth thanks to electrification. They value Surf Air at $4 per share based on 1.5x 2026 EV/revenue, discounted at 15%.
Overweight at Piper means: “Anticipated to outperform relative to the median of the group of stocks covered by the analyst.”
How did the stock react? Shares seesawed through the Friday session following Thursday's earnings-triggered clubbing. For Friday the shares rose to a midday high of $1.79 before reversing and dropping to a closing value of $1.68, up about 3% on the session.
