Square (SQ) - Get Report was double-downgraded, to underperform from buy, by a Bank of America analyst, who expressed concern about the future of many of the payment platform's small to midsized business customers.
Shares of the San Francisco company at last check were down 2.7% to $78.12.
"The gradual (albeit uneven) reopening of various U.S. states is an incremental positive for brick-and-mortar merchants," analyst Jason Kupferberg said in a note to clients.
"However, unlike with overall card spending volumes, we have yet to see the trough in terms of churn among small/midsized businesses."
Kupferberg added that "stimulus funds (at both the individual and small-business level) may be temporarily helping some SMBs stay afloat amid COVID-19, but we believe a significant number of SMBs (especially those with sizable overhead) may struggle to remain in business once these funds are spent, especially if the economy is only partially open."
"For example, we wonder how many restaurants, retailers, or salons can operate profitably if they are only allowed to be 25% to 50% full," Kupferberg said.
"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% of SQ’s payment volume comes from merchants with less than $500,000 in annual card volumes."
Kupferberg said Square's latest gross payment volume data suggest that the worst is likely over in terms of the coronavirus headwinds for that metric.
"However, as different states gradually reopen on varying timelines," he said, "we believe the pace of further GPV recovery is highly uncertain, and will likely vary significantly across a range of spending categories."
The analyst said he remained bullish on Square's competitive positioning over the long term due to its dual-ecosystem business model.
"But with [the] shares trading at 2021 enterprise value/gross profit and enterprise value/Ebitda multiples of 13x and 75x, respectively, we simply feel the stock has moved too far and too fast relative to its near-term fundamental prospects," Kupferberg said.
Separately, Stephens analyst Brett Huff downgraded Square to equal-weight from overweight.