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Electronic payments aim to simplify financial transactions, playing an important role in the global shift to a cashless society. In the world of e-payments, two major players have emerged that are trying to innovate how money moves in this digital age. With their distinct approaches and offerings, fintech companies Block (SQ) - formerly known as Square - and PayPal Holdings (PYPL) have revolutionized online and mobile transactions.
While tech stocks have rallied this year, fintech stocks Block and PayPal have both been clobbered due to macroeconomic pressures, including persistently high interest rates. Block’s stock is down 23.1% for 2023, while PayPal shares have dipped 23% year-to-date, compared to the S&P 500 Index’s ($SPX) gain of 13.6%.
Nonetheless, Wall Street believes that both companies can turn their fortunes around in the near future. Let's dive into their latest quarterly results, growth forecasts, and strategies for the near term to determine which fintech stock is the better buy right now.
Block: Strategic Efforts Drive Growth
Block, under the leadership of CEO Jack Dorsey, has emerged as a major player in the fintech industry. Block operates in two segments: Cash App and Square, both of which reported tremendous growth in the company's most recent third quarter.
Notably, Cash App is a peer-to-peer payment platform that allows users to send money, invest in stocks or Bitcoin (BTCUSD), and even receive direct deposits. Square, on the other hand, is a point-of-sale system that assists small and medium-sized businesses.
In the third quarter, the Cash App segment brought in a gross profit of $984 million, an increase of 27% year-over-year. Meanwhile, Square’s gross profit increased 15% to $899 million. Cash App reported $3.58 billion in revenue, out of which Bitcoin revenue accounted for $2.42 billion, up 37% year-over-year.
According to management, an “increase in both the average market price of bitcoin and the quantity of bitcoin sold to customers” drove this growth. The company is enhancing both the Cash App and Square platforms, driven by this strong traction.
Additionally, Block has expanded its offerings to include business loans and banking services. Bolstered by growing demand for cryptocurrency and the emerging trends in decentralized finance, the chances of Block getting bigger are high.
Looking ahead, management also shed light on near-term growth projections. In Q4, gross profit could be in the $1.96-1.98 billion range, while adjusted EBITDA could arrive in the $430-450 million range. Management further expects to adhere to its “Rule of 40” path to generate gross profit growth in the mid-teens and adjusted operating income margin in the mid-twenties by 2026.
Block’s focus on growth and profitability is great news for long-term investors. However, only time will tell if the company can achieve its targets.
Meanwhile, analysts are highly optimistic Block will have a profitable year in 2023, with earnings per share (EPS) forecast to increase 87% to $1.88 on $21.7 billion in revenue. In 2024, revenue and earnings could increase by 12% and 50%, respectively.
Block is currently trading at 17 times forward earnings - which appears reasonable, based on its 2024 earnings growth projections.
What Is Wall Street’s View on Block Stock?
Overall, Wall Street rates SQ a “moderate buy.” Out of the 34 analysts covering Block stock, 22 have a “strong buy” recommendation, 2 suggest a “moderate buy,” and 10 call it a “hold.” Based on analysts' average price target of $77.80, Wall Street sees potential upside of about 61% in the next 12 months.
PayPal: International Reach, Operating Discipline Could Spark Growth
PayPal has emerged as a global digital payments powerhouse. Its secure and straightforward platform has made it a go-to choice for online purchases, person-to-person transfers, and business transactions worldwide. The platform's key strength is its global reach, which now covers 200 countries and supports 25 currencies. Additionally, its acquisition of Venmo, a peer-to-peer payment app, further expanded its user base and diversified its services. PayPal has also begun offering support for various cryptocurrencies.
The company was already tackling slower growth after Ebay (EBAY) abandoned PayPal and replaced it with the Netherlands-based company Ayden. Macroeconomic pressures, such as reduced consumer spending and rising competition in the e-payments space, further added to its woes. However, it appears that PayPal has regained its footing.
In its recently concluded third quarter, revenue grew 8% year-over-year to $7.4 billion. That's still significantly lower than the 11% growth in Q3 2022 and 13% in Q3 2021. However, analysts believe the easing of macroeconomic pressures could drive revenue growth again. The company ended Q3 with 428 million total active accounts.
PayPal’s stock also came under pressure when its newly anointed CEO Alex Chriss replaced Dan Schulman. A sudden C-suite leadership change often alarms investors who are unsure how the new management might add value to the company.
However, the new CEO assured investors during the Q3 earnings call that while headwinds persist, “PayPal will be focused on generating real profit for the company.” In Q3, the company generated adjusted EPS of $1.30, up 20% from the year-ago quarter.
With the current operating discipline, management believes that in Q4, EPS could grow 10% year-over-year to $1.36 on revenue growth of around 6% to 7%. For the full year, the company anticipates EPS growth of about 21% to $4.98, which is nearly in line with analysts’ expectations.
Trading at 10 times forward earnings, the stock seems fairly valued, as PayPal earnings are expected to rise by 13% to $5.61 per share in 2024.
What Are Analysts Saying About PayPal Stock?
Out of the 33 analysts covering PYPL, 17 have a “strong buy” recommendation, one suggests a “moderate buy,” and 15 call it a “hold.” The stock has no “sell” recommendations.
Based on analysts' average price target of $82.53, Wall Street sees potential upside of about 50% over the next 12 months.
The Battle of E-Payment Titans: Who Will Win?
As e-payments continue to transform the way we handle money, the rivalry between Block and PayPal will continue. Looking ahead, both Block and PayPal could experience significant growth once macroeconomic conditions improve. However, analysts predict Block will deliver more growth over the next few years compared to PayPal, given its exposure to Bitcoin and strategic efforts to boost profits.
Wall Street also sees a greater potential upside of 60% for Block’s stock. I agree with the Street's optimistic assessment of Block. As a result, I am currently bullish on Block and neutral on PayPal.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
