We are moving towards a cashless society. The days of carrying cash and coins are far behind many of us. Shoppers are increasingly opting to use digital options such as payment apps, credit cards, and debit cards in stores, which merchants fully support due to increased checkout speed. Digital payments are also the only game in town when it comes to shopping online, and e-commerce sales as a percentage of total retail sales continue to rise. As investors, we must recognize trends like this and profit from them. According to analysts, the following two digital payments stocks have upsides of more than 40%.
Paypal is one of the pioneers of the digital payments space and now powers 435 million consumer and merchant accounts in more than 200 markets. Its brands include Paypal, Venmo, Honey, Braintree, Xoom, Zettle, and others.
The pandemic darling hit an all-time high of $308.53 in July 2021 but has since fallen over 75%, including a decline of over 14% in 2023 alone. However, analysts disagree with the current valuation as the average analyst price target sits at $96.83, reflecting an upside of over 50% from today’s level. As a result, Paypal is rated as a Moderate Buy based on 18 Buys, nine Holds, and zero Sells.
So why do analysts like Paypal so much? Well, for one thing, it’s still growing. In its first quarter ended March 31, 2023, the company reported a 10% increase in total payment volume to $355 billion, a 9% increase in revenue to $7.04 billion, and a 33% increase in non-GAAP earnings per share to $1.17. For the full year of fiscal 2023, Paypal anticipates growth of about 20% in non-GAAP earnings per share to roughly $4.95, meaning the stock trades at just 12.9 times 2023’s estimated earnings right now.
Furthermore, while many players have entered the payments space, Paypal’s importance has not waned. Its total payment volume exceeded $1.3 trillion in 2022 and grew at a compound annual growth rate of 24% from 2017 to 2022, making it an essential piece of the global economy.
It’s rare to find an industry leader still growing substantially and trading for such a low valuation, but that’s what the stock market is handing us with Paypal.
Block is the parent company of Square, Cash App, Afterpay, Spiral, TIDAL, and TBD. It began as a company offering credit card readers to small merchants and has since blossomed into a financial ecosystem.
Like Paypal, Block was a pandemic darling that investors have fallen out of love with in the years since. Its stock reached an all-time high of $281.81 in August 2021 but has lost over 75% since. The stock is relatively unchanged in 2023, falling less than 2% but massively underperforming the S&P 500’s return of about 12%.
Analysts think the days of Block underperforming the market will be in the rear-view mirror in the not-so-distant future as the average analyst price target is currently $89.59, reflecting an upside of over 40%. As a result, Block is rated as a Moderate Buy based on 23 Buys, seven Holds, and one Sell.
Is Block’s stock as undervalued and attractive as Paypal? Well, not quite.
In its first quarter ended March 31, 2023, Block reported net revenue growth of 26% to $4.99 billion and gross profit growth of 32% to $1.71 billion, while its adjusted net income per share more than doubled to $0.40. It also reported gross payment volume growth of 17% to $46.2 billion in its Square ecosystem and 24% to $4.9 billion in its Cash App Business.
Unfortunately, Block does not provide earnings guidance for the full year. However, it did note that it expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of about $1.36 billion for the full year, which would result in a 37% increase from the $991 million reported in Fiscal Year 2022. The average analyst estimate calls for adjusted net income per share of $1.70 for fiscal 2023, giving the stock a forward price-to-earnings multiple of about 37 today – not terrible for a company with so much long-term growth potential.
One final yet critical note about Block is that it was the target of a short report earlier this year. Block quickly responded by calling the report “factually inaccurate and misleading,” but it’s something investors will want to be aware of when assessing the risk profile of the stock.
Closing Thoughts: Digital Payments are an Attractive Investment Trend
Much like e-commerce, digital payments are a very attractive long-term investment trend that savvy investors must take advantage of, and analysts see Paypal and Block as offering both near and long-term growth potential for your investment dollars.