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PayPal or Block?: Both Payment Innovators are Buys

With demand for digital payment solutions expected to be strong for years to come, multiple winners will arise. These two innovators driving the future of financial transactions are begging to...

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This story originally appeared on MarketBeat

For a lot of people, recalling the last time a purchase was made with a check or cash is a challenge.

MarketBeat.com - MarketBeat

Nowadays digital is the norm when it comes to sending and receiving money. Convenience and security are two big reasons why so many of today's transactions occur online.

When the pandemic came along, safety became reason #3. Contactless payments were quickly preferred over presenting paper. This along with the surge in online shopping put the shift toward digital payments on overdrive.

Just because pandemic conditions have improved doesn't mean digital payment platform providers have seen their best days. Many countries have yet to transition from cash and checks. In countries that have, many merchants and consumers have yet to embrace the technology.

As the world's payment channels continue to get intertwined and the proliferation of mobile devices ushers in a new era of mobile payments, online payment providers will continue to experience plenty of growth.

After a period of hyper pull-forward demand caused by the pandemic, growth at digital payment platform companies has slowed. In turn, a nearsighted market has punished the group by slashing share prices to below where they were at the onset of Covid-19. Huh?

Yes, plenty of competition has emerged in the space. But with demand for digital payment solutions expected to be strong for years to come, multiple winners will arise. These two innovators driving the future of financial transactions are begging to be bought at current levels.

Is it a Good Time to Buy PayPal Stock?

PayPal Holdings, Inc. (NASDAQ: PYPL) is trading more than 70% below last summer's peak. Difficult comps have been a main reason for the decline but more recent worries over economic health have made matters worse.

Management lowered its 2022 guidance for a host of reasons, including the absence of government stimulus and inflationary effects on spending by lower-income consumers. Supply chain disruptions that hurt cross-border transactions and eBay's move to its own payment system are additional hurdles.

What the market has blatantly ignored is the fact that despite all of this, PayPal expects to produce 13% to 15% revenue growth this year. Considering this is off of the huge base that was 2021, this is nothing short of incredible. It speaks to the underlying strength in the business and the position the company will be in as the potpourri of mostly near-term obstacles subsides.

The fruits of PayPal's recent growth initiatives have yet to be realized. A partnership with Amazon that lets shoppers pay with PayPal's Venmo has yet to hit its stride. A move into the buy-now-pay-later (BNPL) space also bodes well for long-term growth. Recently acquired online shopping tool Honey has yet to realize its full potential. And let's not forget PayPal is already accepted at more than 75% of the top 100 U.S. retailers and has more than 100 million international users.

After a down year for profits in 2022, profitability is forecast to return to 2021 levels and beyond in 2023. Based on FY23 earnings projections, PayPal trades at 17x compared to 25x and 28x for Visa and MasterCard respectively. This is a disconnect that should gradually be reconciled as we get closer to the rebound year of 2023.

Will Block's Stock Recover?

Block, Inc. (NYSE: SQ) is down 75% from its peak and the reasons behind the selloff have been similar to those related to PayPal. In addition, the former Square has been hurt by the downturn in Bitcoin. Last quarter's 22% revenue drop was primarily driven by a 50% plunge in Bitcoin-related revenue.

Bitcoin's heavy weight in the revenue mix is reason for caution, but Block will likely become far less dependent on the volatile cryptocurrency market going forward. Its core Square terminal and other point-of-sale merchant solutions should continue to generate growth as more mom-and-pop businesses gravitate to consumer-friendly and cost-effective payment systems.

Then there is peer-to-peer mobile payment platform CashApp which has been popular with younger generations. Along with Bitcoin trading, the app will soon let users buy fractional equity shares free of commissions on top of its core money transfer functionality.

Yet it is the acquisition of global BNPL platform Afterpay that could be Block's most promising long-term growth driver. Afterpay adds a network of around 100,000 merchants and 16 million consumers globally, not to mention immense cross-sell possibilities. The space has been under pressure of late due to concerns about rising rates and consumer spending, but should ultimately be a growth area in both online and physical retail. At a time when consumers are getting buried by high credit card interest, the option to pay for purchases over time without incurring interest or fees will start to look better and better.

As with PayPal, 2022 is a year in which the reset button will be hit at Block. Financial results will be well below what they were last year mainly due to the pull-forward effect. But after this runs its course, analysts are anticipating a sharp rebound in Block's bottom line. The current consensus EPS estimate for fiscal 2023 implies an improvement greater than 90%.

From there Block is likely to deliver the high growth that brought its share price to nearly $300 a year ago. The near-term challenges will likely persist, but given where the global payments industry is going the building blocks are there for a return to the early pandemic glory days.

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