After climbing to all-time highs in September 2018, investors seemed to lose their faith in shares of Square (NYSE:SQ). Last fall the payment and business tools specialist passed the century mark, clocking in at over $100 per share, before losing half its value by year end.
Square has been finding its way back into the good graces of Wall Street in recent weeks. One analyst upgraded the stock, saying that the bad news is mostly in the rearview mirror. The market rejoiced, sending Square shares up more than 6% in the wake of the positive call.
Business-focused card gaining momentum
Raymond James analyst John Davis upgraded Square on Tuesday to market perform (hold) from underperform (sell), arguing that the company's recently introduced debit card for small businesses will be a catalyst. Davis said the card is gaining traction and calculates that it could be worth as much as $100 million in revenue for Square by 2020. He also thinks the impact in 2019 will be "just enough" to help the company surpass Wall Street's expectations in the back half of the year.
This was the second vote of confidence from the analyst community in as many days. Stephen Biggar of Argus Research initiated coverage on Square on Monday with a buy rating and issued a $94 price target, 26% higher than Friday's closing price. Biggar posited that Square will grow profit by an average of 56% in the coming two years, which will justify the company's lofty valuation at 82 times 2020 earnings-per-share estimates. Recent innovations, like Square Online Store and Square Invoices, will help drive merchant adoption in the months and years to come.
Issues largely past
The rating change comes just a few months after Raymond James had downgraded Square shares. In late January, Davis downgraded Square to "underperform" (the equivalent of sell) from "market perform" (hold), citing a lack of growth opportunities. "We believe organic growth peaked in 3Q18 and growth on the all-important subs and services line will likely materially decelerate in 2Q19," Davis wrote in a note to clients. At the time, the analyst slapped a $56 price target on the stock, 27% lower than it recent close.
He was also bearish on Square's move into banking products. The company had previously filed paperwork with regulators that would allow Square to operate as a loan company, bypassing the need to work with other banks and intermediaries when making loans. This was seen as a negative by some investors, due to the risk associated with loan defaults.
The winter blues
A number of catalysts sent Square plunging late last year. In addition to concerns about the trade war -- which helped drag down much of the market -- Square had a number of company-specific contributors.
In early October the company announced that its highly regarded chief financial officer, Sarah Friar, would be leaving Square to assume the role of CEO at another company. Friar was widely credited with helping Square achieve its success, as the stock increased more than five-fold since its public debut in 2015.
Another catalyst was the sale of more than 103,000 shares of stock in October by Square CEO Jack Dorsey. This appeared to be a planned sale, as Dorsey doesn't take a salary. Still, it contributed to investors' negative sentiment toward to stock.
Finally, the investing community had become accustomed to massive top-line growth and strong guidance from Square. Several quarters of decelerating revenue growth led some shareholders to conclude that the honeymoon was over.
It's important to note that Square is in the early innings of a massive opportunity. The changing payments landscape, combined with the company's focus on innovation and emphasis on mobile devices, puts Square in the perfect position to continue disrupting payments and e-commerce in the small business arena.