Is There Deep Value to Be Had in PayPal and Block?

PayPal and Block have seen their stocks plummet

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May 10, 2023
  • PayPal and Block may look undervalued through the eyes of contrarians after their latest moves lower.
  • Both companies face a slate of headwinds going into the second half of the year.
  • The stakes still seem high as negative momentum builds on itself.
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The fintech scene has been crushed, with PayPal (PYPL, Financial) and Block (SQ, Financial) feeling profound selling pressure through 2022. The selling started a bit before the rest of the stock market rolled over in January 2022. Shares of PayPal actually peaked out back in July 2021, while Block peaked in February 2021. Undoubtedly, the fintech scene heated up way too fast in the early days of the Covid-19 pandemic, when it seemed like the wind was at the back of the digital payment companies. As it turned out, some of the pandemic-induced tailwinds didn't last, so enthusiasm for fintech stocks faded quickly.


These days, although most of the rest of the stock market has found its footing, with large-cap technology companies rising higher on a year-to-date basis, PayPal and Block still seem to be stumbling.


Indeed, if the selling started well before the rest of the market, I think it's likely that it may last longer as well. It's been ugly for fintech. However, we will eventually reach a point where the selling activity is overdone. Not to discount the competitive headwinds faced by the likes of PayPal or Block, but the implosions in the rear-view now seem incredibly painful. It's unclear when the pain will end, and there are daunting challenges ahead in terms of increased competition and, in Block's case, the cryptocurrency market cooldown. However, I believe brave deep-value investors may want to give the battered digital payment companies a second look even as they continue their descent.

Driving efficiency could be critical

This quarter's earnings season hasn't been too dreadful in my opinion. Some of the big tech companies have delivered impressive results in spite of the macro headwinds. There's no denying the resilience of the powerful large-cap technology names like Meta Platforms (META) as they go into efficiency-driving mode. Can the same be said of PayPal and Block, though?

Personally, I believe PayPal and Block can follow in the footsteps of Meta by seeking places to reduce costs. Given how much things like efficiency and job cuts have been rewarded by investors in recent months, it's arguable that the fintech innovators may be able to utilize a similar game plan in order to convince investors to change their opinion on their stocks.

PayPal has already laid off 7% of its workforce (around 2,000 people) earlier this year, though clearly that wasn't enough to make investors optimistic. Whether there will be more cuts remain to be seen. Regardless, there is some worry about how earnings growth will fare as more recession headwinds come knocking. Further, competition in the digital wallet space seems to be growing with the introduction things like Shop Pay and Amazon (AMZN, Financial) Pay. And with a brand that may not be strong enough to keep customers from jumping ship, it's really hard to bet on PayPal.

Of course, there's the year-end retirement of PayPal CEO Dan Schulman that's also acting as a bit of an overhang, as the company looks to find a suitable successor amid a vicious sell-off.

Block, formerly known as Square, which took on the new company name when blockchain and cryptocurrency hype took off in 2021, may wish to explore initiatives to improve its efficiencies as well. Like PayPal, the company must continue spending a decent sum to stay on the cutting edge of fintech innovation. At the same time, higher rates and calls for improved nearer-term fundamentals have been tough to avoid. Block has also suffered from the decline in popularity of cryptocurrencies.

Will hopping aboard the AI train be enough to turn the tide at PayPal?

With so much enthusiasm over artificial intelligence (AI) and its potential, PayPal and Block may have the means to accelerate their transition towards greater efficiency. According to Schulman in a recent earnings call, "AI will enable us to meaningfully lower our costs for years to come."

Indeed, the AI buzzword has been used quite a bit lately. It's difficult to gauge how much AI will help PayPal turn a corner. Regardless, investors don't seem to be too confident at this juncture, not after its latest underwhelming operating margin numbers. The stock slipped more than 12% after the quarterly report. Despite the weak margins, the company expects operating margins to expand by 100 basis points going forward. How large a role AI will play in this is a mystery at this juncture.

Final thoughts

PayPal and Block are actually down a similar amount (just shy of 80%) from their respective all-time highs. There is a lot of negativity priced into both names. Until the companies can deliver some awe-inspiring results, I'd be inclined to sit on the sidelines, as I'm not so sure how much value there is to be had with these names. It may be significant, but the risks seem considerable as well.


I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure