It has been a rough go for fintech stocks over the past six months, and many investors are sitting on the sidelines, wondering when the carnage will end. There is so much uncertainty in the markets and within the global economy that it is hard to know when we will hit bottom.
But there are two fintechs, in particular, that Wall Street analysts view bullishly pretty much across the board: Block (SQ -1.73%) and Bill.com (BILL -0.07%). Let's take a look at these two stocks and what Wall Street thinks of their growth prospects.
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1. Building up Block
Block, the parent company of Square, is a payment provider that distinguishes itself by the fact that it serves both sides of the transaction. It serves the consumer with its Cash App, through which people can send money to friends, invest, and handle personal finances. It also serves the merchant on the Square side of the business with a whole suite of products, including its card reader and register to accept payments, software to handle payroll and other back-office functions, and buy now, pay later (BNPL) capabilities. It also has a bank charter, which ties the two together, and allows Block to offer loans and deposits to individuals and small businesses.
The Cash App generated $624 million in gross profit in the first quarter, up 26% year over year, while the Square side of the business did $661 million in revenue, up 41% year over year. However, the company posted a net loss for the second straight quarter. The $204 million net loss in Q1 was the result of a 70% increase in operating expenses, much of which stemmed from its purchase of BNPL specialist Afterpay, along with higher expenses for product development and sales and marketing as it rolls out new products and expands its offerings.
Block's stock price is down about 49% year to date as of June 1, trading at around $82 per share. That's down precipitously from a 52-week high of $289 per share last August. The majority of Wall Street analysts give Block a buy rating, with a consensus price target of $142 per share -- up about 73% from the current level.
Goldman Sachs analyst Michael Ng gave Block a price target of $173 per share recently, saying the company was "well positioned to benefit from Cash App's growing monetization from new product features (e.g., tax preparation, card spending, cash management, stock investing, Bitcoin) while enjoying ongoing user growth from the network effects of P2P (person-to-person) payments, as well as Square's continued share gains within SMB (small- and medium-sized business) acquiring." He also said the acquisition of Afterpay should help integrate the Square and Cash App ecosystems "through the addition of new consumers and merchants, as well as helping to establish commerce & brand discovery features into Cash App while generating leads for merchant."
2. Bill.com sees surging revenue and expenses
Bill.com is a company that produces a cloud-based payments platform that helps small- and medium-sized businesses handle accounting, bills, reconciliation, and other back-end solutions. Its key advantage is its artificial intelligence, which automates and streamlines the process.
The company went public in late 2019 and had been on a rocket ship, surging to a 52-week high of $348 per share last November. It is currently trading at about $116 per share, down 53% year to date.
The surging stock price was fueled by huge growth in revenue and customers, as well as an oversold tech market that led to a bubble. While the bubble burst, Bill.com's revenue growth keeps trending up. In the most recent quarter, its fiscal Q3, the company saw revenue increase 179% year over year to $167 million, while gross profit was $129 million, up from $44 million a year ago. Subscription fees rose 78% while transactions fees jumped 286% year over year.
However, the company has yet to make a profit, as it had a net loss of $87 million in the March quarter, up from a net loss of $27 million a year ago. Expenses also continue to ratchet up: The company had $212.7 million in expenses in the most recent quarter, up from $59.6 million a year ago, and through the first three quarters, expenses total $576.6, up from $161.7 million in the same period of the last fiscal year.
Wall Street analysts expect big things from Bill.com, as the consensus price target over the next 12 months is $197 per share, which would represent a gain of 67% from its current price.
JPMorgan Chase analyst Tien-Tsin Huang was less bullish than others with a price target of $140 per share by the end of 2022. In a research note in May, Huang said Bill.com "built a platform to solve the age-old problem SMBs have in paying bills, and has established itself as the category leader, and we expect growth to accrue quickly." He said the platform should be a sought-after solution in this economic environment: "In an inflationary environment, where costs of doing business are rising, we argue that BILL's outsourcing solution could gain relevance. SMBs looking to maintain their growth without correspondingly scaling their back-office cost base could turn to BILL (and other automation solutions) to unlock time and cost savings.
Should you buy?
Of the two, I'd lean toward Block for a few reasons. For one, despite the huge drop in its stock price, Bill.com still has a price-to-sales (P/S) ratio of around 22. That's down from 50 at the end of the March quarter, but still it's high and indicates the company remains overvalued by the market. Block's P/S ratio is a much healthier 2.6, which is down from 11 a year ago.
Also, while Block had a net loss in the last quarter, it has been profitable. However, expenses related to the Afterpay acquisition pushed it further into net loss territory last quarter and expenses are expected to increase next quarter, too, due to higher product development and marketing costs. But Bill.com has seen expenses consistently rise and has not yet shown the ability to turn a profit.
Finally, Block has established itself as a leader in both of its ecosystems and has a huge addressable market between the two as it looks to bring them together. All that said, I'm not certain that Block has hit bottom yet, given the uncertainty, so it might be wise to wait on both right now.
