The steep sell-off in growth stocks since late 2021 has dragged valuations of fintech companies such as Block (NYSE:SQ) and PayPal (NASDAQ:PYPL) significantly lower. For instance, SQ stock is down more than 84% from all-time highs, while PYPL stock is trading 82.6% below record levels, making them attractive investments for contrarian and value investors. I am bullish on SQ due to its widening crypto ecosystem and neutral on PYPL stock, as its revenue growth continues to decelerate at a rapid pace.
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Let’s compare the two stocks using TipRank’s comparison tool.
Block (NYSE:SQ)
Valued at $26.9 billion, Block stock has returned 294% to shareholders since its IPO (initial public offering) in late 2015. It has two primary business segments, which include Square and Cash App.
Square aims to simplify the payment ecosystem for small and medium businesses by offering a suite of hardware and software services. Comparatively, Cash App allows users to send, receive, spend, save, and invest money on a single and unified platform. While Square focuses on enterprises, Cash App targets individual consumers.
As mentioned earlier, Block stock looks more attractive than PayPal due to crypto tailwinds and the firm’s growth potential. So, let’s dive in.
Increasing Revenues and Income. Crypto Tailwinds Ahead
In Q2 2023, Block increased its gross profits by 27% year-over-year to $1.9 billion. While Square’s gross profits were up 18%, Cash App increased this figure by 37%, allowing Block to more than double its net income to nearly $247 million.
Cash App now accounts for 52% of total gross profits and ended Q2 with 54 million active users. The mobile-based personal finance tool makes it extremely easy for users to set up a direct deposit, invest in financial products, and gain exposure to Bitcoin (BTC-USD). Cash App basically acts as a substitute for banking and brokerage accounts.
Square reported a gross profit of $888 million in Q2. The payments platform reported a gross payment volume or GPV of $54.2 billion in the June quarter, rising 12% year-over-year. In the last two years, its GPV has increased by 39.7%, which is quite impressive.
In addition to its flagship offerings, Block operates Spiral, which allows users to build open-source projects to advance the use of Bitcoin as a tool for economic empowerment. Moreover, it operates TBD, an open developer platform, making it easier to access Bitcoin.
It’s quite evident that Block is betting big on the growing adoption of Bitcoin and cryptocurrencies in the upcoming decade. Additionally, the next Bitcoin bull cycle is expected to begin in 2024, driving prices of the digital asset higher, which could act as a tailwind for Block.
Plenty of Growth at a Low Valuation
Block estimates its total addressable market (in terms of gross profit) to be $190 billion, which suggests it has realized less than 5% of this massive opportunity. Right now, SQ stock trades ~4x gross profit, which is quite cheap, given its historical trends. When Block was trading near all-time highs, its gross-profit-to-forward-market-cap ratio was much higher at 38x.
Analysts tracking the fintech stock expect adjusted earnings to rise from $1 per share in 2022 to $2.45 per share in 2024. So, SQ stock is priced at 18.2x forward earnings for 2024, while its earnings are forecast to grow by 28.2% and 34.7% in 2025 and 2026, respectively.
What is the Price Target for SQ Stock?
Out of the 32 analysts covering SQ stock, 24 recommend a Buy, and eight recommend a Hold. The average Square stock price target is $78.43, which is 76.9% above current prices.
PayPal (NASDAQ:PYPL)
One of the many beneficiaries during COVID-19, PayPal shares almost tripled between the start of 2020 and July 2021. However, as economies reopened and inflation accelerated in 2022, the pandemic-infused tailwinds subsided, resulting in slower top-line growth and narrowing profit margins, making me neutral on the stock.
In Q2 2023, PayPal increased its revenue by 7% year-over-year and reported a net income of about $1 billion compared to a loss of $341 million in the year-ago period. Comparatively, PayPal increased its revenue by 20.7% in 2020, 18.3% in 2021, and 8.5% in 2022.
PayPal has focused on lowering its cost base to improve the bottom line, as operating profits increased by 430 basis points in the June quarter.
PayPal also ended Q2 with 431 million active accounts and is among the most widely accepted digital wallets in the U.S., Canada, and Europe. It is the undisputed leader in the online payment processing segment, with a share of 41%, providing the company with a competitive moat.
Further, PayPal recently partnered with Apple (NASDAQ:AAPL) to allow users in the U.S. to integrate PayPal-branded debit or credit cards with Apple Pay.
PayPal is forecast to grow its adjusted earnings from $4.13 per share in 2022 to $5.66 per share in 2024. So, the stock is priced at 9.9x forward earnings for 2024, much lower than SQ stock’s valuation. But analysts expect PayPal earnings to grow by mid-teens percentages annually for the next five years, much slower than Block’s estimated growth forecasts.
What is the Price Target for PayPal Stock?
Out of the 32 analysts tracking PayPal, 21 recommend a Buy, and 11 recommend a Hold. The average PayPal stock price target is $85.17, which is 57.7% above the current trading price.
The Final Takeaway
Both Block and PayPal offer massive upside potential, according to analysts. It’s possible that both these fintech giants will deliver outsized gains to shareholders when market sentiment improves in the near term. However, I believe Block’s improving profit margins and stellar growth profile make it a better Buy than PayPal.
