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Tuesday’s analyst calls: Big banks get major upgrades, UBS calls for 25% rally in Spotify

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(This is CNBC Pro’s live coverage of Tuesday’s analyst calls and Wall Street chatter. Please refresh every 20-30 minutes to view the latest posts.) Some of the biggest U.S. banks got major upgrades Tuesday. Morgan Stanley raised its rating on Goldman Sachs, Bank of America and Citigroup to overweight, calling for roughly 20% upside for all three stocks. Elsewhere, UBS upgraded Spotify as it grows bullish on the streaming giant’s efforts to grow margins. Check out the latest calls and chatter below. All times ET. 7:08 a.m.: BTIG upgrades Block to buy, bullish on Cash App and Square growth Analyst Andrew Harte upgraded Block to buy from neutral, saying margins are poised to expand. His $85 price target implies shares could gain more than 23%. “We see the company’s growth opportunities paired with management’s focus on bottom-line as presenting an attractive investment opportunity,” Harte wrote in a Tuesday note. “Our core investment thesis is focused on SQ’s attractive position between the consumer and merchant with its Cash App and Square ecosystems and potential for each segment to become stronger as integrations are built between them.” Harte said Cash App and Square are strong as individual units and are expected to grow throughout fiscal 2024 and beyond. Square’s increased focus on costs are attractive, he added, saying he expects the company to reach its goal of mid-20s adjusted operating margin by 2026, which should pose an opportunity for investors who are increasingly focused on GAAP profitability. Block’s stock price traded nearly 3% higher in early morning trading. Shares are down 10.8% so far this year. — Pia Singh 6:33 a.m.: Western Alliance shares are ‘fully valued’, according to Wells Fargo Wells Fargo downgraded Western Alliance Bancorp to equal weight from overweight. “Current results and guidance leave little room for error … risk/reward scenarios at this stock price level seem skewed to the downside,” analyst Timur Braziler wrote in a Monday note. “Valuation is now about in line with peers … and fully valued, in our view.” Shares are up about 6.6% this year, last closing at $70.11 per share. Braziler’s new price target of $72, higher by $10, suggests about 2.7% potential upside over the next 12 months. Braziler noted that the bank’s costs have increased, reflecting higher deposit earnings credit rate, higher tech and insurance spend. Liquidity and capital build are also taking away from profitability, he added. “Near-term efficiency and profitability still lag pre-pandemic levels,” Braziler said. “In an upside scenario, WAL is able to return to industry leading growth, establish a solid capital base, and regain its prior levels of profitability. WAL has never had an issue being profitable, it has had an issue getting the proper multiple for that profitability.” — Pia Singh 6:07 a.m.: Oppenheimer downgrades Five Below on worries of slowing growth Five Below’s valuation may not be aligned with its fundamentals, according to Oppenheimer. Analyst Brian Nagel downgraded Five Below to perform from outperform. He also lowered his price target on the discount retailer to $200, suggesting shares could gain just 7% over the next year. During premarket trading on Tuesday, shares fell 1.7%, adding to the stock’s losses of more than 12% this year. “Strategic positioning of the unique Five Below model and consumer proposition remain robust,” Nagel wrote in a Tuesday note. “That said, we are starting to fret that underlying growth dynamics for FIVE are slowing, at least somewhat, given a now larger base of units, waning remodeling opportunities, and stepped-up reinvestment requirements, on top of already elevated operating margins.” As the pace of growth for Five Below gradually diminishes, Nagel forecasted that the premium multiple shares at which shares trade could also moderate towards “recent troughs.” He expects new store expansions to also gradually slow to the low-double digits. — Pia Singh 6:05 a.m.: Raymond James initiates CrowdStrike with outperform rating Cybersecurity company CrowdStrike is a bullish play for the long run, according to Raymond James. Analyst Adam Tindle initiated coverage on the stock with an outperform rating and $330 price target, which implies 9.8% potential upside for the stock. “Our thesis is predicated on a near-term view that net new ARR (key growth metric) should accelerate alongside stabilization/improvement in the device end market as CY24 progresses,” Tindle wrote in a Monday note. “We model this metric slightly above Street estimates for the next few quarters, but would not be surprised to see actual results well in excess of our current estimates.” Tindle added that, for longer-term investors, CrowdStrike — with its detection and response services — will be a beneficiary of the value chain in cybersecurity shifting from proactive to reactive, given that high-profile security breaches have become seemingly inevitable. CrowdStrike’s customer base is also roughly half the size of peers Palo Alto Networks and a fraction of Fortinet’s, suggesting room to grow in customer acquisition. These shifts should drive operating leverage and cash flow generation, according to the analyst. Shares gained 0.4% in premarket trading. Tindle acknowledged that the stock — which has gained about 17.8% so far this year — is one of the most expensive in the firm’s coverage universe, and that downside from valuation multiple compression could be significant at more than 50%. — Pia Singh 5:42 a.m.: Spotify gets an upgrade from UBS as efficiency initiatives play out UBS thinks Spotify still has room to run as the streaming giant focuses on margin expansion, price increases as well as subscription and advertising growth. These initiatives, in turn, should lead to higher earnings and revenue, according to the firm. Analyst Batya Levi upgraded shares of Spotify to buy from neutral and increased his price target by $104 to $274, which implies 25.3% potential upside for the stock. “We think efficiency initiatives remain the focus and have increased conviction on sustainable margin expansion and stronger bottom line trends in the coming years,” Levi wrote in a Tuesday note. “While investors have struggled in the past with valuation given lack of profitability, we expect SPOT to gain valuation support with EBITDA now firmly in positive territory and growth pegged against peers.” The analyst said Spotify’s podcast business is on track to break-even in the first half of this year, and that its music segment should also benefit from new royalty deals with labels, which should support ad-supported margins. Revenue should grow 13% CAGR between 2023 and 2027, and gross margins should also expand during that period, Levi said. The stock is up more than 16% higher this year, and jumped more than 118% over the past year. Shares traded about 2% higher in premarket trading. — Pia Singh 5:42 a.m.: Raymond James downgrades AMD Artificial intelligence expectations for AMD are becoming too elevated, according to Raymond James. The firm lowered its rating on the chipmaker to outperform from strong buy. It also raised its price target to $195 per share from $190, but that only implies upside of 9.6%. “We project AMD’s base business to earn $3.5-4 in 2025, which means AI GPUs will need to contribute > $3 EPS. That is equivalent to $12B revenue or 800k units,” wrote analyst Srini Pajjuri. “In comparison, we estimate NVDA shipped 2M units in CY23 and are projecting 3.2M units for CY25. While ~20% unit share is not impossible, we think it’s a little premature to give the benefit of the doubt.” AMD shares dipped slightly in the premarket. The chipmaker’s stock is off to a roaring start for 2024, surging 20.6%. AMD YTD mountain AMD in 2024 — Fred Imbert 5:42 a.m.: Morgan Stanley upgrades Bank of America, Citigroup and Goldman Sachs Morgan Stanley is getting bullish on major banks. Analyst Betsy Graseck raised her rating on Bank of America and Goldman Sachs to overweight from equal weight. She also upgraded Citigroup to overweight from underweight. Broadly, she cited three reasons for her optimism on the major banks: Risks from upcoming “Basel Endgame” rules “coming into focus: “Reading the tea leaves, it looks like Basel Endgame will be significantly lightened up vs. the current proposal.” The possibility of greater buybacks, “especially given large banks have the highest excess capital levels ever in an environment where loan growth is tepid.” “Our conviction in a capital markets rebound is growing.” Specifically for BofA, Graseck said the stock is now trading at an attractive valuation, adding the banking giant benefits from a “strong consumer deposit franchise, with 92% of consumer checking accounts being primary accounts and 67% of deposit balances being with customers that have been at BAC for more than 10 years.” The analyst raised her price target on Bank of America to $41 from $32. The new forecast implies upside of nearly 22%. Graseck also called Citigroup “the biggest beneficiary among the money centers from potentially lighter Basel Endgame rules as their stock trades at only 0.5x [book value per share]. That means they have the ability to buy back stock below book, a very accretive financial transaction.” Morgan Stanley raised its price target on Citigroup to $65 from $46, implying upside of 20.1% over the next 12 months. As for Goldman, Graseck noted it’s the bank with the most exposure to a “capital markets rebound, with 64% of revenues coming from Global Banking & Markets in 2024 in our model.” She raised her price target on the stock to $449 from $333, implying 18% upside. Bank of America and Goldman shares are off to a sluggish start for 2024, losing 0.2% and 1.4%, respectively. Citigroup has outperformed early in the year, rising 5.2%. BAC C,GS YTD mountain BAC, C and GS in 2024 — Fred Imbert

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