U.S. tech stocks are taking a pounding this moth, but one of the hardest hit names is Square Inc. (SQ). Even after stabilizing in the past two weeks, SQ stock is down 23 percent on the month, and analysts are divided on whether or not the sell-off is a buying opportunity for long-term investors.
The Square sell-off accelerated earlier this month after the company announced the surprise departure of chief financial officer Sarah Friar. The timing of the departure spooked investors after BTIG analyst Mark Palmer said earlier that week that Square may have more exposure to credit risks than investors realize.
Palmer said Square’s growth is becoming increasingly reliant on credit extensions to its small business customers, which has left the company vulnerable to any potential tightening in the credit market. Just two days later, Friar announced she is leaving Square to join startup Nextdoor as CEO.
In a follow-up note following Friar’s departure, Palmer says Friar has served a much more important role at Square than the typical Wall Street CFO given the nature of Square’s business and the fact that CEO Jack Dorsey’s attention is split between his duties at Square and Twitter, Inc. (TWTR).
“We believe Friar’s pending departure from SQ introduces a significant new element of uncertainty into the company’s story that may further weigh on its valuation,” Palmer says.
Palmer has reiterated his concerns over Square’s credit market exposure and says risk still appears skewed to the downside even after this week’s drop.
“We continue to believe the stock is overvalued at over 45x the consensus FY20E adjusted EBITDA, particularly given our view that the credit risk arising from SQ’s expansion of lending within its Square Capital unit is not fully baked into its valuation,” he says.
But while Palmer is sounding the alarm bells, Stifel analyst Scott Devitt says Friar’s departure doesn’t change square’s bullish long-term trajectory.
“We expect the company to continue to benefit from the ongoing penetration of larger merchants, Square’s new partnership efforts, and the company’s emerging financial services offerings (Cash App), which increase the total addressable market and support higher levels of growth,” Devitt says.
BTIG has a “sell” rating and $30 price target for Square. Stifel has a “buy” rating and $100 target for SQ stock.
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