The fintech industry is on a rapid northbound path, and thanks to the increased need for digital payment methods, that likely won't stop anytime soon. Naturally, investors want to cash in on this, and two notable companies to consider doing so are Block (XYZ 0.71%) and PayPal (PYPL -0.71%). These fintech giants have been rocked by company-specific issues this year, and the volatility broader equities experienced probably didn't help things either. However, both stocks could still deliver attractive returns over the long run.
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1. Block
Block is famous for running two key ecosystems: Square, which offers businesses slick point-of-sales systems and other services, and Cash App, a peer-to-peer payment app increasingly competing with banks. Though Block's two core businesses have generally performed well, the company's first-quarter results were disappointing due to Cash App's less-than-impressive growth. Overall, Block's financial results were not what investors had in mind, leading to a significant post-earnings sell-off; the stock is down by 30% year to date.
The good news is that Block has several growth opportunities. It recently announced that it had received approval from the U.S. Federal Deposit Insurance Corporation (FDIC) to offer Cash App users consumer loans directly instead of relying on an approved partner bank. This development is great for Block, but a critical point to note here is that the company continues to add new products to its Cash App and Square ecosystems.
Block's services have historically expanded, whether customer loans, crypto trading, buy-now-pay-later offers, etc. With about 57 million monthly active users within Cash App, cross-selling more of its added services could meaningfully move the needle for Block. That's partly why Cash App's gross profits increased by 10% year over year to $1.38 billion despite its monthly active users remaining flat compared to the year-ago period. The fintech specialist expects new loan products (which it is expanding to more consumers following the FDIC's approval) to help spur growth.
And that's before we talk about the fintech leader's Square ecosystem, which is still making steady progress. Block estimates its gross profit opportunity to be in the neighborhood of $190 billion. In Q1, its total gross profit grew by 9% year over year to $2.29 billion. Competition is tough. Block won't get close to capturing this entire market by itself. But if the fintech specialist can grab even 5% of it in the next five years, its financial results will improve meaningfully. And in the long run, Block will continue capturing transaction fees that would otherwise go into the pockets of traditional banks.
Though the stock is down this year, it could still deliver strong returns in the long run.
2. PayPal
PayPal's shares have dipped this year because of poor financial results. In Q1, the company's revenue grew by just 1% year over year to $7.8 billion. However, the company is also looking at several growth opportunities. PayPal recently announced it was introducing an advertising business. The company has a well-established and trusted brand in the financial services industry. Linking consumers and businesses through this ad platform could be massively lucrative, especially considering PayPal's ecosystem of 436 million active accounts as of the end of Q1, an increase of 2% year over year.
Furthermore, PayPal benefits from a strong network effect. The more businesses accept it as a form of payment, the more valuable it is to consumers. Though active account growth has decelerated significantly since the early pandemic days, that was to be expected. Elsewhere, PayPal has been focusing on controlling costs and boosting the bottom line. In Q4, the company abandoned unprofitable growth within its Braintree payment-processing business, which means lower top-line growth but juicier bottom lines.
In Q1, the company's adjusted earnings per share jumped by 23% year over year to $1.33. With growth opportunities like advertising, its ecosystem still expanding, and increased efficiency and profitability, PayPal's prospects still look attractive. The stock is a buy this year while its shares are down by 18%.
