Technology and growth companies have taken a blow in recent months as interest rate hikes, accelerating inflation, and dismay surrounding Russia and Ukraine continue to spook the global economy. As a result, shares of the financial technology titans PayPal Holdings (PYPL 0.20%) and Block (SQ -0.11%) have nosedived of late, shedding 63% and 53% of their market value, respectively, in the past six months. This should draw the attention of long-term investors, provided both companies are equipped with enormous runways for growth in the years ahead.
Short-term headwinds may govern share price movements for the foreseeable future, but investors with long time horizons can exploit the market's sentiment today by acquiring top-quality companies at bargain prices. Both companies sit at the epicenter of a huge secular growth industry and have consistently reported striking numbers. On that note, let's closely examine both companies to help you determine which one -- if either -- is the better fit for your portfolio today.
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PayPal offers dependability
PayPal is definitely the safer choice of the two stocks. Boasting a 50% global share of the payment-processing software industry, the company has established a hardy economic moat. PayPal enjoys 426 million active accounts and is accepted at 76% of the 1,500 largest retailers across North America and Europe, easily making it the market leader in the two regions.
The company's fundamentals are strong, too. PayPal reported revenue of $25.4 billion and $4.60 in earnings per share in 2021, translating to 17% and 19% growth year over year, respectively. Total payment volume surpassed $1 trillion for the first time ever, climbing 33% from a year ago. With a cash position of $5.2 billion and a debt-to-equity ratio of only 43%, PayPal's balance sheet is quality. Generating cash is becoming a hobby for the fintech leader as well -- the company grew free cash flow and cash from operations by 38% and 31% year over year in the fourth quarter, up to $1.6 billion and $1.8 billion, respectively.
Given its colossal size, PayPal's growth should excite investors. Likewise, the company's stable balance sheet and robust cash flow generation provide another layer of security for its shareholders. In my view, PayPal offers investors a perfect mix of stability and growth that is hard to find anywhere else.
Block offers the better growth story
Those with a big appetite for growth should resort to Block. While the company's sales grew 86% in 2021 up to $17.7 billion, investors should focus more on Block's gross profit. This is because Block's top line is significantly impacted by fluctuations in the price of Bitcoin. Consumers are able to buy Bitcoin via Block's Cash App platform. Serving as the middleman, Block purchases Bitcoin from private brokers and takes a small cut before selling it to Cash App users. Bitcoin revenue -- although equaling more than 50% of total sales in 2021 -- only represented 5% of gross profit. Hence, gross profit is a better indicator of the overall growth and financial stability of Block's business.
Don't be troubled, though -- Block's gross profit increased 62% year over over in 2021 to $4.4 billion. The Cash App ecosystem continues to pave the way, with a gross profit of $2.1 billion, or 69% growth, this past year. Similar to PayPal, Block's balance sheet and cash flow generation are sound. Block's $7.4 billion in available liquidity triumphs over its $5.5 billion in debt, and the company has grown free cash flow at a compound annual growth rate of 45% over a three-year span. The variation in the two companies arises from net profits. While Block has reported a positive bottom line in the past, the company still has plenty to prove on the profitability front compared to PayPal. There's nothing wrong with that, either -- Block is a much younger company.
How do their valuations line up?
Taking its higher growth into account, it makes sense that Block is more expensively valued than PayPal today. According to Morningstar data, Block is trading at a price/earnings-to-growth (PEG) ratio of 3.24, which is three times greater than PayPal's multiple of 1.05. Investors may be willing to pay a loftier price for Block's superior growth; however, the substantial difference is certainly eye-opening.
My preference
While I could argue that both stocks are solid long-term investments, I prefer PayPal over Block in today's market. Sure, Block may be experiencing stronger growth, but PayPal is more reasonably priced and is expanding steadily as well. The company's proven business model and enormous runway for growth gives investors the best of both worlds. And with the shares down so much this past year, it's hard to ignore the company at this point. Investors should definitely consider PayPal today -- not too often are they given an opportunity to acquire an industry leader at such a discounted price.
