Fintech, or financial technology, is a sector that's been getting clobbered lately. Between rising interest rates, geopolitical tensions in Europe, and the pandemic still raging in many regions, instability is one of the only trends that's consistent. And when there's volatility, investors tend to move their money away from growth stocks and into established, secure stocks.
This is leading to plummeting prices for many stocks in the fintech sector. Companies that have seen their stock prices multiply many times over the past few years are experiencing setbacks, and while it can create confusion and fear for investors, it also generates opportunity for long-term thinkers. Some stocks whose valuations may have seemed ludicrous last year are now in affordable territory. Hot fintech company Block (SQ -1.56%), formerly Square, and newer fintech Bill.com Holdings (BILL -0.08%) have both lost more than 30% of their value since the beginning of the year. Does that mean it's a great time to buy on the dip? And if so, which one is the better buy?
The original fintech disruptor
Block operates two businesses: its sellers business and its Cash App digital payments business, which it runs as two separate "ecosystems." It offers various functions within each system for a complete suite of services for small businesses or individuals, and both arms have posted high growth over the past few years. That's translated into high returns for investors, to the tune of nearly 500% gains over the past five years.
The company started out with sellers services, hence the original name Square, which it took from its square-shaped credit and debit card reader. Cash App was a complementary business that offers easy-to-use personal financial services, and that was an exciting addition to the company's product collection. However, its new angle, including changing its name to Block and everything that means, hasn't been as well received by investors.
Block's new focus is cryptocurrency, and although its standard businesses are flourishing, the company's new direction isn't as clearly headed for success. It has built up a stockpile of Bitcoin, with more than $200 million in Bitcoin purchased, and in the 2021 third quarter it launched TBD, an open-developer platform to simplify access to Bitcoin for the common person. The company also counts Bitcoin purchase trades through Cash App accounts as revenue, which subjects the business to cryptocurrency volatility. Bitcoin accounted for 57% of revenue in 2021, and Cash App revenue increased 106% year over year, but only 65% excluding Bitcoin.
On the one hand, it's the company's boldness to go to new places, under the direction of its visionary leader Jack Dorsey, that has solidified it as a top industry player. On the other hand, the same tendency to reach over the edge means it might have gone a little too far for mainstream investors right now.
While early investors have benefited from owning Block stock, recent investors haven't done as well. The stock is down nearly 60% over the past year, despite sales increasing 86% year over year in 2021 and the company posting a profit for three straight years.
Better services for small businesses
In many ways, Bill.com is similar to what Block was when it started out. It offers a suite of back-office financial solutions for small and medium-sized businesses, and it's demonstrating impressive growth.
The company's solutions help small businesses manage cash flow through its cloud-based platform, simplifying operations like accounts payable and accounts receivable, payments, and general accounting. Fiscal 2022 second-quarter (ended Jan. 31) revenue increased 190% year over year, and the company reached more than 3 million network members.
It's beefing up its business with acquisitions to offer a more competitive service to customers, starting with accounting platform Divvy last year. It recently acquired Invoice2go, a mobile invoicing platform that makes it easy for small businesses to manage relationships online. It has more than 225,000 subscribers in more than 150 countries, and it increases Bill.com's reach to sole proprietors, rounding out its product suite and opening up an addressable market that processed $25 million in payments in the trailing 12 months ended last June.
The company sees a global market of more than 20 million small businesses and $125 trillion in business-to-business payments. It has multiple growth drivers between acquiring new customers, expanding its services, increasing adoption among existing customers, and increasing its international business.
Which is the better buy?
Bill.com is still fairly new as a public company, with an initial public offering in December 2019. It's already gained more than 380% since that time, but it's trading at a valuation of 38 times trailing-12-month sales, even though it's lost a significant amount of its value this year. It's also posting increased losses.
Block also posted a loss in its most recent quarter, although it's been profitable for quite some time. At the current price, shares are trading at a more modest three times trailing-12-month sales.
Both of these companies are demonstrating growth and have strong long-term trajectories. I'm somewhat wary of Block's cryptocurrency focus, but considering Bill.com's high price tag and Block's established ability to create stable businesses and turn a profit, I would say it might be prudent to wait on Bill.com, making Block the better buy today.