Shares of financial-technology company Square (SQ -1.57%) have not only significantly underperformed the S&P 500 this year, but they're also down 40% from an all-time high achieved in the second half of 2018. Square investors have had a rough run recently, to say the least.
While the stock may have got ahead of itself in 2018, giving some merit to the pullback in the fast-growing company's share price, this sell-off might be overdone -- at least that's what three analysts covering Square stock are arguing.
Here's a look at three recent upbeat analyst notes on Square.
Square for Restaurants platform. Image source: Square.
MoffettNathanson: The sale of caviar could lead to growth
Overall, Square demonstrated more of the same strong growth it has demonstrated for years when the company reported its second-quarter results on Aug. 1. Adjusted revenue rose 46% year over year to $563 million. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) jumped 54% to $105 million. But the company's outlook for third-quarter top- and bottom-line growth missed analysts' forecasts, sparking a sharp decline in the stock price.
MoffettNathanson analyst Lisa Ellis says this has presented a buying opportunity, particularly since Square's recent decision to sell Caviar in a deal worth $410 million freed up some capital for reinvestment in growth opportunities.
"The divestiture will free up investment dollars for Square to pour into its core Seller and Consumer businesses," Ellis wrote in a note to clients (as reported by MarketWatch).
She upgraded her rating on the stock from "neutral" to "buy."
SunTrust: Strategic investments could drive growth
Meanwhile, SunTrust Robinson Humphrey analyst Andrew Jeffrey also upgraded Square stock on Tuesday, updating his rating on the stock from "hold" to "buy."
"We expect Square to invest in [2020] to address complex retail and restaurants," wrote Jeffrey. "These investments should bolster capabilities for large, inventory-intensive retailers where we believe it currently competes poorly."
More investment on this front would make sense, as the company has seen outsize revenue growth from large sellers -- particularly those with annualized gross payment volume (GPV) greater than $500,000. In Square's second quarter of 2019, sellers with GPV of half a million dollars or more accounted for 26% of Square's revenue, up from 22% in the year-ago quarter and 19% in the second quarter of 2017.
Deutsche Bank: Strong top-line growth should persist
While Square's revenue growth has decelerated recently, Deutsche Bank analyst Bryan Keane says its organic year-over-year revenue growth rate should stabilize in the forties or high thirties going into 2020.
Like the other analysts, Keane believes the pullback in Square's stock price is a buying opportunity. "We don't believe there has been any change to the company's robust fundamentals and long-term outlook," the analyst said in a note to investors on Aug. 22.
But not all analysts are bullish on the stock. Atlantic Equities analyst Kunaal Malde initiated coverage of Square stock on Tuesday with an "underweight" rating and a $55 12-month price target -- below Square's $61.13 price when the market closed on Tuesday. The analyst cited a deceleration in the company's core business and intense competition from PayPal's peer-to-peer payment app Venmo as some of the key reasons for his bearish outlook.
Square's sliding stock price is certainly worth a closer look. These mostly optimistic views from analysts for the tech stock highlight how a stellar company's stock has taken a significant beating and may have created a compelling buying opportunity for investors. Investors, of course, should be careful to do their own due diligence.
