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PayPal (NASDAQ:PYPL) and block (NYSE:SQ) are two of the most popular fintech stocks today. The market capitalization of both companies is approximately $50 billion to $60 billion. Both have strong growth histories. And both have plenty of potential for growth.
But there’s one stock you should buy more today.
PayPal bets $5 billion on itself
PayPal doesn’t need much introduction.Spun off from parent company eBay In 2015, the company had over 400 million users worldwide. From e-commerce to paying friends back, most people have personally used her PayPal or know someone who does.
PayPal stock has a more volatile history.
After its split from eBay, PayPal’s stock price soared from $40 to $300 per share in just three years. But since those all-time highs, stocks have skyrocketed. PayPal stock is currently trading at 2017 prices.
PayPal stock currently trades at just 2.2 times sales, a common valuation metric for growth stocks. This is the lowest-priced stock in history.
Management realized the decline in valuation and chose to invest $5 billion in stock buybacks. The company hopes to double its earnings recovery by buying back its own shares at a discount.
There’s just one problem. PayPal has been around for a while. The company has already spent $15 billion on stock buybacks since going public in 2015. These buybacks would have been carried out at much higher prices than they currently are, destroying shareholder value.
PayPal isn’t doing well as a company, but don’t be fooled into thinking a low valuation multiple is a clear buy signal. The reason the stock is cheap is probably because the company is past its best growth period.In fact, its user base is contraction For the past two years.
The stock may have value at today’s depressed prices, but there are better options for growth investors. It’s a stock whose turnaround story has already begun.
This is a fintech stock worth betting on
Brock has faced unique struggles. While the company has traditionally been a payments processor, it has also recently been an investor in other areas, including peer-to-peer payments service Cash App, music platform Tidal, and blockchain-related ventures, which have also seen their share prices plummet. are doing. After slowing growth and declining profitability.
On a sales basis, Block stock is actually cheaper than PayPal, trading at 2.1x sales. But as we’ll see, the underlying business is much stronger.
The first advantage Block has over PayPal is its higher growth rate.
By some metrics, PayPal’s business is shrinking, while most of Block’s segments are experiencing strong growth. For example, Block’s Cash App has 56 million monthly users. The company continues to grow this user base, although growth has slowed significantly in recent quarters.
Continued user growth has allowed Block to maintain much greater revenue growth than PayPal ever achieved, even when it became an independent company and was a hot stock.
The block is also well-positioned for future growth.
As the company name suggests, Block has made big bets on emerging blockchain technologies, including: Bitcoin. Users of the company’s Cash App can already buy, sell, and trade with Bitcoin. Meanwhile, the company’s Square payment processing platform is ready to bring crypto trading to the masses. While PayPal defends a plateauing business model, Block is positioned to take advantage of growth trends such as cryptocurrency adoption.
So why is Block stock cheaper than PayPal?
For most of PayPal’s public history, the company has been profitable and amassed billions of dollars in free cash flow. This is why the company was able to fund its historic share buyback program.
Block, on the other hand, has been unprofitable in recent years. But when the stock soared in 2020, the company had several quarters of profits. This was what the market expected until the stock price crashed after consecutive quarterly losses.
Overall, Block’s profitability is lower than PayPal, but it’s acceptable as long as its growth rate is high. After all, the market is willing to fund companies that grow quickly. But when the growth rate slows, the market suddenly loses the appetite to cover losses.
Last September, Block co-founder Jack Dorsey returned to Block as CEO with one mission: to return the company to profitability. It didn’t take long for this vision to become a reality. In February, the company posted its first net profit in two years, albeit on a small scale.
With the return to profitability, we expect Block’s valuation multiple to rise, especially if this feat is repeated in the next quarter. Any profitable high-growth stock, no matter how small, deserves a higher multiple than his 2.1x sales in this market.
Between PayPal and Block, Block stock is the clear winner for investors right now.
Should you invest $1,000 in Block now?
Before purchasing Block stock, consider the following:
of Motley Fool Stock Advisor Our analyst team has identified what they believe Best 10 stocks Investors can buy now…and Brock wasn’t one of them. These 10 stocks have the potential to generate impressive returns over the next few years.
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*Stock Advisor returns as of March 8, 2024
Ryan Vanzo has a position in Bitcoin. The Motley Fool has positions in and recommends Bitcoin, Block, and PayPal. The Motley Fool recommends his eBay and recommends the following options: A $45 short April 2024 call on eBay and a $67.50 short March 2024 call on PayPal. The Motley Fool has a disclosure policy.
“Hand Over Fist: 1 FinTech Stock to Buy and 1 FinTech Stock to Avoid” was originally published by The Motley Fool.
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