Proactive Investors - Block Inc (NYSE:SQ) is trading at an attractive valuation “no matter how you slice it,” says analysts at Bank of America (NYSE:BAC) who have reiterated their ‘Buy’ rating on the stock.
They have a $82 price target on the Fintech firm, which is the parent company of Square (NYSE:SQ) and CashApp, implying an upside of more than 30% from Block's closing price on Tuesday of about $62.
“Square is down 27% since recent highs in March despite sturdy fundamentals, creating a compelling entry point,” the analysts wrote in a note to clients.
They believe Block’s shares have lagged in recent months due to questions surrounding Square, specifically on the execution of its new verticalized sales structure following a leadership change and the slowing of Square’s gross payment volume (GPV).
They also pointed to CashApp concerns, specifically uncertainty on the mobile payment platform’s average revenue per user growth potential, monthly active users penetration and an ongoing probe from the Department of Justice over its alleged compliance failures.
Further, they pointed to “small and medium business (SMB) syndrome” which they said was characterized by “increased skittishness following weak results from SMB-centric software companies.”
“We recognize concerns around US GPV growth and SMB, but believe they have been over-discounted in shares,” the BofA analysts believe.
“Historically, gross profit was the only metric Block could be reasonably valued on, but Block’s increased focused on profitability now enables investors to value the stock on adjusted operating income and/or GAAP earnings per share, which should help put a floor in shares. SQ trades at a steep discount to comps on most of these metrics despite solid execution.”
The analysts believe Square has an enviable combination of growth and “real” profitability.
They see shares re-rating if Block can demonstrate a gradual reacceleration in GPV growth, especially in the US.
“This would help allay concerns regarding competition and affirm CEO [Jack] Dorsey's strategy, while lending support to out-year Square forecasts,” they wrote.
“While macro remains a wildcard, and Square is levered to in-store spending at SMB merchants, we note that GPV comparisons (global and US) get steadily easier the next four quarters.”