Despite strong bullish momentum for the broader market in 2023, many financial technologies stocks have continued to struggle this year. Notably, PayPal (PYPL -1.45%) has fallen 23% this year while Block (SQ -2.33%) is down 19%. Both stocks are now down about 82% from their respective peaks.
Which of these high-profile fintech companies stands as the better investment opportunity right now? Read on for a look at competing bull cases presented by two Motley Fool contributors.
PayPal has come a long way
Parkev Tatevosian: PayPal has done an excellent job of growing and becoming a giant in the payments industry. Indeed, the company has surpassed 400 million active accounts, increased revenue meaningfully over the last decade, and, most importantly, boosted profitability.
The primary customer value PayPal provides is convenience in making online purchases. Instead of taking out your credit or debit card to input your information on every new website or app you shop on, you can use PayPal.
Of course, if customers appreciate the convenience, merchants want to accept it as a payment method, or they risk losing customers to rivals. That factor has led PayPal to reach 428 million active accounts (merchants and buyers) as of its latest update.
Of course, account growth is meaningless unless it results in revenue and profits. Between 2012 and 2023, PayPal’s revenue increased from $6.7 billion to $27.5 billion. More impressively, its operating income jumped from $1.1 billion to $4 billion.
PayPal’s stock is not without risks. Namely, the company has shed active users for three consecutive quarters, and its transaction margin is falling. However, I think the stock price is more than accounting for the risks in the business.
Data source: YCharts
The stock is trading at a forward price-to-earnings multiple of less than 10, which, in my opinion, offers investors an excellent risk versus reward for this financial technology company.
Block’s business is turning a corner
Keith Noonan: Block has seen volatile trading in recent years, but its latest earnings report has delivered some very encouraging signals for the business. Between its CashApp mobile payments wallet, its Square payment-processing hardware and software offering for businesses, Bitcoin initiatives, and other operations, things appear to be heading in the right direction.
The company recorded $1.9 billion in gross profit in the third quarter, representing growth of 21% year over year. In Q3, gross profits from CashApp grew 27% year over year to reach $984 million. Meanwhile, gross profit from the Square platform grew 15% year over year to reach $899 million.
Block looks poised to reach Rule of 40 status in 2026, which is viewed by some analysts and investors as a key benchmark for success and sustainability for software services companies.
While the typical definition for Rule of 40 involves having a combined sales growth rate and profit margin of at least 40%, Block uses a gross-profit growth rate and non-GAAP (adjusted and not in compliance with generally accepted accounting principles) operating income margin because gross profit is a better reflection of its financial performance.
If the company continues to show progress meeting its initial Rule of 40 goal, with at least mid-teen percentages gross profit growth and a mid-20% operating-income margin by 2026, the stock has a good chance of delivering strong gains above current pricing levels.
Which stock is the better buy?
At current prices, Block and PayPal each have room to deliver strong returns for patient investors. Which stock should come down to your personal risk tolerance and portfolio goals. For investors looking for deep-value plays in the fintech market, PayPal is likely the better buy. The company trades at low earnings multiples, and its deeply entrenched business could power substantial valuation recovery.
For more growth-oriented investors, Block may be the better portfolio fit. While the company’s current valuation already prices in some strong performance, the fintech specialist has continued to increase its sales and gross profits at an encouraging clip and still has a long runway for continued expansion. Block looks like the riskier of the two stocks, but it could deliver more upside.