Fintech, short for Financial Technology, refers to any business that integrates technologies such as data science, artificial intelligence (AI), and blockchain to strengthen or automatize traditional financial services. The fintech industry has evolved quickly since the onset of the COVID-19 pandemic.
According to Market Data Forecast, the global fintech industry is estimated to advance at a CAGR of 23.4% over the next four years, hitting $324 billion by 2026. Consequently, fintech companies should capitalize on the industry’s growth. However, fintech companies have faced industry-specific challenges and market-wide correction in the second half of 2021, which pushed their stocks to the 52-week low territory.
With this in mind, today, I am going to analyze and compare two promising fintech stocks: Block, Inc. (SQ) and PayPal Holdings, Inc. (PYPL). SQ is a fintech company that creates solutions, enabling merchants to accept card payments. SQ also provides multiple auxiliary tools and services for sellers. PYPL is one the largest debit electronic payment systems that enables customers to pay bills and purchases, send and receive money transfers.
Over the past six months, SQ stock plunged 43%, while shares of PYPL lost about 40% of their value.
On January 7th, Truist Securities analyst Andrew Jeffrey reiterated bullish views on Block as it believes that increasing adoption of point-of-sale software and payments integration should support future growth. However, the firm lowered SQ’s price target from $315 to $250 amid high growth equity risk premiums.
On January 7th, Bloomberg reported that PayPal is taking steps to launch its own cryptocurrency, known as stablecoin. The company said that it would closely work with the regulator before launch. Stablecoins are digital assets backed and priced by the value of currency or commodity.
Recent Quarterly Performance & Analysts’ Estimates
On November 4th, Block reported lower-than-anticipated third-quarter earnings, causing its shares to sink over 3% in after-hours trading.
In Q3, SQ’s revenue increased 26.7% year-over-year to $3.84 billion due to a 40% and 11% increase in transaction-based and bitcoin revenue, respectively. However, the company failed to beat the Wall Street consensus by $640 million. Besides, SQ’s Non-GAAP EPS stood at $0.37, in line with analysts’ consensus.
Analysts reached a consensus estimate of $0.25 EPS for the fourth quarter, down 20.80% year-over-year. Also, a $4.04 billion average revenue projection for the next quarter implies a 27.99% increase year-over-year.
PYPL’s total revenues for its fiscal third quarter of 2021, ended September 30th, 2021, rose 13.2% year-over-year to $6.18 billion, however missing Wall Street estimates by $50 million. PayPal’s transaction revenues came in 10% higher year-over-year at $5.61 billion due to the growth in Braintree products and services. PYPL reported a Non-GAAP EPS of $1.11, surpassing analysts’ estimates by $0.03.
Besides, U.S. Venmo customers will have a Venmo payment option on Amazon.com in 2022.
Currently, Wall Street expects PYPL’s EPS to rise 3.94% year-over-year in FQ4 to $1.12. Following this trend, analysts see its fourth-quarter revenue at $6.89 billion, indicating a 12.69% year-over-year increase.
Comparative Valuation & Profitability
Block currently trades with a Forward P/E of 83.75x, which is significantly higher than PYPL, whose multiple is presently 40.68x. However, both fintech companies look overvalued compared to the sector’s median of 24.60x.
In terms of the Forward EV/EBITDA multiple, Block’s multiple of 66.41x is about 2.24x higher than PayPal’s 29.59x. Both multiples are above the sector’s median of 16.06x.
Finally, PYPL has a better margins profile with a gross profit margin TTM of 47.82%, surpassing SQ’s gross profit margin of 24.21%. Its EBITDA margin of 21.12% and net income margin of 20.09% exceed the SQ respective figures by 8.21x and 6.25x.
The Bottom Line
I believe that PYPL, at these levels, is a better long-term pick. Although SQ delivered higher top-line growth in Q3, its bitcoin revenue figures could be affected significantly amid ongoing BTC correction, leading to an earnings miss as a result. On the other hand, PYPL’s Amazon deal should boost its transaction revenue in the coming quarters. Finally, PYPL looks relatively cheaper from a valuation standpoint with better margins.
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SQ shares were trading at $137.44 per share on Monday afternoon, down $4.10 (-2.90%). Year-to-date, SQ has declined -14.90%, versus a -3.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist. More...
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