In the battle for fintech supremacy, PayPal Holdings (PYPL 0.64%) and Block (SQ -1.57%) (formerly known as Square) are two strong contenders. Each has a different approach to the many technologies changing consumer finance, with some crossing over and directly competing.
Each has also had a rough six months, with Paypal and Block stocks trading down about 49.5% and 61.7%, respectively, from their 52-week highs. As both have hit tantalizing valuations, which one is the better buy now?
Image source: Getty Images.
The business models
PayPal has created its super app to assist consumers in every financial segment. Users can stash their savings in a high-yield account, send money to family and friends, trade stocks and cryptocurrencies, and even receive their paycheck up to two days early when using its direct deposit capability. Additionally, its Venmo platform can make peer-to-peer payments and pay for items on Amazon. PayPal is all about simplifying the financial lives of its users.
Block recently changed its name because it is no longer a single-segment business; instead, it has multiple faces. Most recognizable is its Square point-of-sale (PoS) solution, which many small businesses use. The platform lets businesses process payments, manage staff, and market to customers. Block's Cash App is a direct competitor with Venmo, but with added capabilities like investing and banking. These segments built Block into what it is today, but what will transform Block is its crypto and blockchain technologies.
Through Spiral, Block is making Bitcoin a feasible payment option for goods and services everywhere. The most ambitious project Block has is TBD54566975 (yes, that is its real name). This is based on a whitepaper published by the project and tackles decentralized identity standards and credentials for cryptocurrencies. While it may seem far-fetched, if TBD54566975 works out and becomes the standard (and hopefully gets renamed), it could be Block's biggest opportunity.
Profitable vs. unprofitable
Despite what the stock movements convey, both companies have excellent financials.
During the third quarter, PayPal's revenue increased 13% on a currency-neutral (FX) basis -- but more impressively, its total payment volume was up 24%. Unlike Block, PayPal is solidly profitable and generated $0.92 per share in earnings, up 7% from last year.
Square's revenue grew much faster than PayPal's at 26%, but management doesn't want investors to key in on that metric. Instead, it focuses on gross profit as it subtracts hardware and transaction costs, giving investors a better idea of how the business is really doing. Gross profit grew 43% during the third quarter, but it wasn't enough to turn a significant profit as Block barely broke even.
When comparing the two businesses, two key metrics are total payment volume and gross margin. These metrics break down how much capital flows through their platforms and how much it costs to do it.
| Company | Total/Gross Payment Volume | Gross Margin |
|---|---|---|
| PayPal | $310 billion | 48% |
| Block | $45.4 billion | 24% |
Data source: PayPal, Block, and Macrotrends.
PayPal's products cost less than Block's, giving it more capital to work with after the cost of revenue is subtracted. Additionally, PayPal has almost seven times as much money flowing through its network, giving it a larger grasp on consumer finances. However, the payment volume argument could be flipped on its head by viewing PayPal's volume as Block's opportunity.
Both stocks are on sale
As PayPal is profitable and Block is not, each must be valued differently. For PayPal, its price-to-earnings (PE) ratio has reached lows not seen for nearly five years.
PYPL PE Ratio data by YCharts
Using analysts' projections, its forward P/E is only 33, making it cheaper than Mastercard at 34 despite PayPal's innovation. I think PayPal is a steal at these prices, and investors would be wise to scoop some up.
In a similar story, Block is also priced historically low.
SQ PS Ratio data by YCharts
Even with a low gross margin, a price-to-sales (P/S) ratio of 4 appears to be a bargain. It last reached this threshold during the height of the pandemic market crash.
Which stock is the better buy?
Both of these companies have been caught up in the tech growth stock sell-off triggered by the increased likelihood of interest rate hikes by the Federal Reserve. Investors' appetite for growth fades during these times because they can get guaranteed returns with higher yields versus investing in riskier growth stocks. However, I feel this mindset completely misses PayPal's and Block's potential.
Both businesses are strong and benefit from the shift to a digital economy without physical cash. I think both are great buys, but depending on an investor's mindset, one could trump the other. PayPal is a solidly profitable company and has management who believe it can grow earnings by 22% annually through 2025. Block's product pipeline could make it a fortune should its blockchain standard and Bitcoin use become mainstream.
I still think PayPal is the better buy, but Square could be the better investment if it accomplishes all its goals -- a tall task, from my viewpoint. Still, investors must hold on to both of these stocks for at least five years to appreciate the investments these companies are making now.
