PayPal (PYPL 2.90%) and Block (SQ 2.32%) are leaders in the lucrative digital payments industry. Each has carved out a valuable niche in the broader sector, and they have proven to be pioneers in displacing cash. Shares of both are down big from their peaks, presenting investors with a potential opportunity.
Which one of these top fintech stocks is the better one to own? Let's look at the investment merits of both PayPal and Block before coming to a conclusion.
PayPal: A digital payments giant with strong financials
With 433 million active accounts and $1.36 trillion in 2022 total payment volume, PayPal is an industry juggernaut. It is not only a popular service that allows merchants to accept cashless payments but the most ubiquitous digital wallet, with a huge lead over second-place Apple Pay. In fact, PayPal is accepted by 79% of the top 1,500 online merchants across North America and Europe.
During the worst of the pandemic, when consumers were flush with cash and spending more money online, PayPal boomed. But as things normalized, coupled with the current uncertain macroeconomic environment, growth has slowed dramatically. Revenue in the first quarter of 2023 (ended March 31) was up 8.6% year over year, a sharp deceleration from the double-digit percentage gains of a couple of years ago.
However, this business possesses a wonderful financial profile, with net cash on its balance sheet of $4.4 billion (as of March 31). Over the past five years, the company's quarterly operating margin averaged 16%. And in 2022, PayPal generated $5.1 billion of free cash flow, with the expectation to produce $5 billion this year.
PayPal shares are currently 79% off their all-time high. And they are down 7% in 2023, while the Nasdaq Composite Index has jumped 30%. As a result, the stock trades at a trailing price-to-earnings (P/E) ratio of 28 and a forward P/E of 13. Based on the stock's historical valuation, this is a very attractive entry point for investors to buy the leader in electronic payments.
Block: Two budding ecosystems with huge growth potential
Block's original business plan was based on making it possible for smaller merchants to accept card payments. Today, this is known as the Square segment, which processed $46.2 billion in gross payment volume (GPV) in the first three months of 2023. A key trend that has benefited this division is Square's ability to attract large merchants, or those that handle annualized GPV of at least $500,000.
On the other side of the equation, Block also has a compelling personal finance offering known as Cash App, which has 53 million monthly active users. Customers can send or receive money, set up direct deposit, or buy stocks and Bitcoin. Cash App registered a gross profit of $931 million in the last quarter, up 49% compared to the first quarter of 2022.
Block's growth strategy centers on launching new product and service features, as well as entering new markets. The company currently operates in the U.S., Australia, U.K, Japan, Spain, Canada, and France, so it does have notable international exposure and the potential for more. Looking at the bigger picture, the management team thinks Block's total addressable market (in terms of gross profit) is $120 billion, up significantly from previous estimates.
As of this writing, Block's stock is down 77% from its peak price in August 2021. As the Federal Reserve hiked interest rates to fight inflation, investors have soured on growth tech stocks, a category that Block occupies. Although Block posted a $553 million net loss in 2022, Wall Street analysts expect the business to start producing positive and rising net income this year.
It's all about what investors prioritize
PayPal has a valid investment case thanks to its strong financial profile, increasing engagement, and low valuation. And this might be enticing for some investors who want a more mature, cash-generative business.
Block might catch the eye of investors who are more interested in sizable growth prospects. Additionally, if you are bullish on Bitcoin but aren't comfortable buying it directly, Block could give you the exposure you are looking for through its Cash App and other Bitcoin-focused segments.
It's ultimately up to you to decide what aspects are more important to the investment decision.
