What happened

Shares of Block (SQ 4.92%) sank in morning trading Thursday as the point-of-sale device maker formerly known as Square  continued to feel the aftershocks of PayPal's (PYPL 1.50%) distressing fourth-quarter earnings report, which sent the entire payments sector into a tailspin on Wednesday.

Block lost more than 10% Wednesday, while PayPal lost almost a quarter of its value. As of noon ET Thursday, Block was off by another 8.2% from the previous close.

Person inserting credit card into payments device

Image source: Block.

So what

Whatever the long-term prospects are for growth in the payments space -- and they are considerable -- PayPal's fourth-quarter results and weak guidance sent a shudder through the industry because they could portend a dramatic slowdown coming. Management is shifting its focus to generating more revenue from existing users of its platform rather than trying to attract new ones, even as it estimates that its active user growth will woefully fall short of expectations.

Wall Street had been forecasting that PayPal will add 53 million net new monthly active users (MAUs) in 2022, but PayPal's latest guidance only forecasts 15 million to 20 million net new additions. The company has also abandoned its lofty goal of growing MAUs by 750 million by 2025.

What the markets are trying to figure out is whether this dramatic guidance shift by PayPal reflects issues that are endemic specifically to that company and management's recognition that its previous targets were too aggressive, or if it means there is a general malaise spreading over the payments industry.

Now what

Block's stock has been on a downslope since well before PayPal's earnings report, as the market has been rotating away from previously high-flying tech shares and into consumer durables names. Block is down by 63% from the high it touched in August, and is off 35% year to date in 2022.

Because the fintech company is also shifting its focus more toward cryptocurrencies -- in particular, Bitcoin (BTC 1.55%) -- there's a lot more uncertainty associated with it than when it was a straight play on helping small- and mid-sized companies grow their businesses.