Investors continue to sour on fintech giant PayPal (PYPL 0.94%), and its stock is down 12% this year despite sustained growth and progress in cost cutting.
At the same time, competitor Block (SQ 2.48%), formerly Square, is demonstrating stronger growth but widening losses. As of the end of July, the shares were up as much as 28% on the year, but they have since plunged and now are little changed for the year.
Is the market getting something wrong? Let's see.
The case for PayPal: Bigger and leaner
PayPal is head and shoulders above its competition in digital payments, with $1.36 trillion in 2022 total payment volume (TPV), 400 million consumer accounts, and 35 million merchant accounts. It has maintained its first-mover edge in this market, from when it was spun off by eBay as a separate payments company, by consistently upgrading its features and technology.
Revenue growth, which soared at the peak of pandemic, has decelerated since then, though. In the second quarter, revenue increased 7% over last year, and TPV grew 11% to $366 billion. Growing expenses as revenue slowed were weighing on the bottom line, but it made great progress in cost-cutting and improving profitability in the second quarter. Operating income increased 48% over last year, with earnings per share (EPS) swinging from a $0.29 loss last year to positive $0.92 this year.
There's been a lot of talk about competition in this field, starting with Block, but also newer entrants like Apple, which offers Apply Pay, and Alphabet, which offers Google Pay. But PayPal is still the company to beat. More competition, in my opinion, illustrates a growing and wide-open market, which is in PayPal's favor. So long as it's keeping up and innovating, it's well positioned from overall industry growth, despite any newcomers.
What to watch out for: It's losing active customers. Active customer count decreased from 435 million at the end of 2022 to 433 million last quarter and 431 in the second quarter. But is that the full picture? Management has said that this is part of its strategy to focus on the most active customers, who give more bang for the buck. That's reasonable, and it's part of a working plan. However, it's something to keep track of.
The case for Block: Highly innovative
Block captured investors' attention with its innovative business solutions, beginning with its payment card reader and now comprising a suite of advanced solutions to help small and medium-size businesses operate. It became more compelling with the advent of its Cash App business, which drew customers from PayPal's own peer-to-peer payment services like Venmo, with its easy-to-use interface that offers many features.
With Chief Executive Officer Jack Dorsey as its public face, Block became known as the newer, sleeker version of what PayPal was trying to be. It embraced cryptocurrency early on and focused on Bitcoin as a major growth element of its business, and its stock price skyrocketed before the pandemic.
It's working to expand the sellers business by offering more services in one place, including banking and debit cards. That's resulting in higher customer engagement and increasing revenue. Some of that is coming from a move toward midsize businesses, which are much more lucrative than smaller businesses.
Cash App is still the dominant growth segment, and revenue increased 37% over last year. It's configured to grow as a community, and larger networks within the system have higher transactions, leading to a positive cycle. Cash App offers many services, and these work together to create more value as customers who use more services engage more and produce greater revenue.
But Block has also fallen out of favor with investors, for several reasons. One is cryptocurrency itself, which no longer is seen as the "next big thing," with regulators shutting down some platforms and many tokens not living up to their hype. It has also struggled to post profits as expenses pile up, and the sellers business is posting low growth levels.
Wall Street wasn't impressed with Block's second-quarter earnings, even though it beat forecasts on both the top and bottom lines. It's growing faster than PayPal, with total revenue up 26% over last year in the second quarter. Without Bitcoin, which has rebounded from its lows, revenue was up 20%, so the company still has some dependence on cryptocurrency. This quarter the company's crypto holdings were beneficial, but it isn't always the case.
Overall, it has posted net losses for the past seven quarters after reporting positive net income for a few quarters at the height of the pandemic.
The verdict
It's probably obvious at this point that I see a clear edge for PayPal. It's in a great place both in terms of its own business, with new features and services as well as improved cost efficiency, and in terms of overall industry growth. I think Block may prove itself over time, but it already passed its high-growth stage and delivered big gains for investors without reaching the scale it needs to be sustainably profitable. I don't see why it's worth the risk when there are more dependable stocks on the market, or riskier stocks that have a clearer path toward profitability.