BoA Downgrades Square Over SMB Sector Concerns

Bank of America has lowered its rating of Square Inc. by two notches Monday (May 18), downgrading the stock to “underperform” from “buy” amid fears that shops, restaurants, and salons will struggle once COVID-19 funds are spent.

Shares of the San Francisco-based mobile payment company fell by 2.29 percent at noon on Monday (May 18), according to Yahoo Finance. The stock has lost nearly 5 percent over the past three months.

Bloomberg News reported analyst Jason Kupferberg said the gradual opening of states amid the coronavirus is a positive sign for retailers. But he has yet to see a window in terms of churn among small and medium-sized businesses (SMBs).

“The extent of SMB churn is hard to quantify, and likely won’t be known for perhaps another six months, but we note that 75 percent of Square’s payment volume comes from merchants with less $500,000 in annual card volumes,” he said.

Kupferberg wrote that stimulus checks could help some small businesses temporarily stay afloat. But many SMBs could struggle to stay open when those funds disappear, especially if states reopen the economy with restrictions.

“For example, we wonder how many restaurants, retailers or salons can operate profitably if they are only allowed to be 25-50 percent full,” he said.

Kupferberg also highlighted Square’s 26 percent rally so far this year in contrast with a 9 percent decline for the S&P 500. The stock may have “moved too far and too fast relative to its near-term fundamental prospects,” he wrote.

Square Inc.’s stock has soared by about 12 percent since reporting its first quarter 2020 results on May 6.

Kupferberg also explained his rating for Automatic Data Processing Inc. (ADP), the New Jersey-based human resources management software and services provider, has shifted to “underperform” from neutral given the extreme stress on employment markets.

Paychex Inc., the New York provider of human resource, payroll, and benefits outsourcing services for small to medium-sized businesses, is expected to provide an update call on Tuesday (May 19). Kupferberg wrote it could be a negative catalyst for ADP, as Paychex will probably pre-announce a guidance miss for the quarter ended May 31.

Kupferberg rates Paychex underperform as well since 99 percent of its revenue comes from U.S. SMBs averaging 16 employees.