August 3, 2022, PayPal Holdings, Inc. (NASDAQ:PYPL) and Block, Inc. (NYSE:SQ)
With FinTech back in style, these disruptive names look like the best stocks to buy now.
Although the economic and geopolitical situation remains murky with August starting off with two consecutive down days, never time the market. Beaten-down FinTech stalwarts PayPal Holdings, Inc. (NASDAQ:PYPL) and Block, Inc. (NYSE:SQ) are gaining steam and look like two of the best stocks to buy now.
If there’s one theme we’ve seen recently, it’s that FinTech is back in style. Even though the sector was gravely affected by inflation, chip shortages, supply chain logjams, and geopolitical headwinds in 2022, the tide appears to be shifting.
From digital payment processing to online banking, FinTech is one of the 21st century’s most robust growth markets and a sector for forward-thinking investors. After underperforming for much of the year, even relative to tech, things are looking different. Just look how the ARK FinTech Innovation ETF outperformed the tech-heavy Nasdaq index by roughly 6% since June 16, 2022, for example.
According to Wells Fargo analyst Jeff Cantwell, the time to buy FinTech stocks is now. Two of the companies he specifically mentioned were PayPal and Block.
In his view, FinTech has $1.5 trillion potential with a 6% CAGR over the next decade.
Most importantly, he sees the sector potentially increasing revenues by an average of 30% over the next two years, with profits significantly outpacing the S&P 500’s.
But the current discount FinTech stocks like PayPal and Block sit at won’t last forever. Thanks to countless catalysts, mouth-watering growth prospects, and colossal analyst upside, these two innovators are undoubtedly two of the best stocks to buy now.
PayPal Holdings, Inc. (NASDAQ:PYPL)
This FinTech pioneer is surging following blowout earnings and could have another 60+% to run.
Drums of war are beating in Taiwan right now. It’s beginning to look eerily similar to the months and weeks leading up to what happened in Ukraine.
But an even bigger war is going on, and it will likely affect your wallet. That war is the war on cash.
What is the war on cash? The war on cash refers to the world transitioning from physical cash to digital payments. PayPal arguably began this war in 1998 and has remained a dominant force in a rapidly growing and evolving market. With mobile payments forecast to reach $588 billion at a 35.3% CAGR by 2030, PayPal is your best weapon in this war on cash.
It continues to diversify its business with offerings like Venmo, BNPL (buy now, pay later) services, and resources for financial transactions in approximately 200 markets in roughly 100 currencies.
Better yet? It sits over 70% below its all-time highs at a historically cheap valuation.
With the 32.63% rally it’s seen since June’s lows, your time may be running out to get it while it’s still cheap. That alone is why it’s one of the best stocks to buy now.
Outstanding Q2 Earnings Could Send the Stock Soaring
What a difference a quarter can make. After reporting a lackluster Q1, PayPal blew Q2 numbers out of the water on Tuesday (August 2, 2022) after the market closed.
Earnings, first and foremost, came in at $0.93 a share compared to the projected $0.86 per share. Revenue came in at $6.81 billion vs. the projected $6.79 billion and grew 9% year-over-year.
However, this wasn’t all that investors cheered in its earnings report.
- By the quarter’s end, PayPal had 429 million active accounts, a 6% year-over-year increase.
- Announced measures to cut costs by $900 million this year, with the expectation that annualized benefits from these initiatives could save at least $1.3 billion in 2023.
- A new $15 billion share buyback program.
With PayPal increasing its full-year guidance from $3.81-$3.93 EPS to $3.87-$3.97, it’s probably not surprising to see the following outstanding growth projections:
- Earnings for PayPal are expected to grow by 67% in the coming year.
- Net income is projected to grow by 7.7%.
- Revenue is forecast to have an 5% 5-year CAGR.
However, these earnings alone are not why PayPal shares rose as much as 13% in extended trading. Some potentially game-changing and fortune-changing news broke in that same earnings report involving a prominent activist investor dumping a war chest of capital into PayPal.
Investors are Cheering Elliott Management’s Stake in PayPal
Public companies are much more scrutinized than they used to be in this 24/7 information age. Their feet are against the fire to please all shareholders ranging from the small retail investor to the giant hedge fund. When times get tough, activist investors tend to get deeply involved by dumping a boatload of capital to heavily influence the vision and trajectory of a company.
PayPal has not been immune to this throughout the treacherous waters of 2022.
Some investors fear activists and what they could mean for a company. Others like Carl Icahn, Nelson Peltz, and Bill Ackman are famous for their largely successful track records.
Judging by how PayPal’s shares have reacted to the news of activist Elliott Management’s deeper involvement in the Company, it could be an excellent thing.
When news broke on July 27, 2022, that Elliott Management was steadily buying up PayPal’s stock to expedite its cost-cutting measures, the PYPL stock surged by over 10%.
When it was revealed during the earnings call that Elliott had a $2 billion stake in PayPal and an information-sharing agreement on value creation, the stock surged even more.
Love or hate activists, it’s pretty evident that investors overwhelmingly see Elliott’s involvement as a positive catalyst to make it one of the best stocks to buy now.
Strong Underlying Fundamentals and Shocking Value
Elliott Management’s stake in PayPal is exciting. But they likely wouldn’t have dumped all this money into the stock if it didn’t have great fundamentals and incredible value. We can talk about all the other reasons why PayPal is one of the best stocks to buy now, but these factors certainly serve as the foundation.
First and foremost, PayPal is highly undervalued relative to its history. PayPal’s 29.0x trailing P/E is well below its 5-year average of 57.2x, and its 23.1x forward P/E is dirt cheap for such a high-growth stock. Its valuation also implies an outstanding free cash flow yield of 4.8%.
Additionally, compared to many of its top competitors, the Company is hugely profitable, with positive cash flows more than capable of covering interest payments.
Three of its margins add more context to this.
Wall Street Sees Outstanding Long-Term Prospects and as Much as a 61.78% Upside
According to Tipranks, 27 Wall Street analysts offered 12-month price targets for PayPal in the last 3 months. It has a high price target of $160.00, a low of $80.00, and an average of $115.39. The average price target represents a 28.74% upside from August 2, 2022’s $89.63 close.
With PayPal still a major FinTech force in the payments space, Wall Street is becoming increasingly encouraged by its long-term prospects.
Morgan Stanley recently reiterated an OVERWEIGHT rating with a $129 price target and declared that PayPal could grow faster than eCommerce by 2-3% over the next few years. Weeks later, following PayPal’s earnings, they boosted their price target to $134.
On July 27, 2022, Berenberg Bank gave PayPal a $145.00 price target, representing a 61.78% upside.
In a Monday (August 1, 2022) note, D.A. Davidson gave PayPal a $120.00 price target and called reactions to “temporary” headwinds an overreaction.
But, following its blowout earnings report, the following analysts roared back before the market opened on August 3, 2022, and boosted their price targets.
- Evercore ISI- Boosted price target from $124.00 to $136.00
- Morgan Stanley- Boosted price target from $129.00 to $134.00
- Wells Fargo & Company– Boosted price target from $97.00 to➝ $123.00
- Credit Suisse Group– Boosted price target from $95.00 to $110.00
- JMP Securities- Boosted price target from $100.00 to $120.00
- Citigroup- Boosted price target from $120.00 to $122.00
- KeyCorp- Boosted price target from $100.00 to $115.00
PYPL’s year-to-date low and high are $67.58 and $196.10, respectively.
Block, Inc. (NYSE:SQ)
This top-10 FinTech company could see a 50+% upside and triple-digit net income growth.
Since its inception in 2009, the Jack Dorsey-run Block, Inc., formerly known as Square, Inc., has disrupted finance as one of the world’s most innovative FinTech companies.
In recent times, it’s easy to associate Block with crypto. After all, that’s why it rebranded from Square last December. As its Square Cash App continues to grow, it’s seeing immense potential as a platform helping people manage money, buy stocks and cryptocurrency, and more.
However, the Company is one of the best stocks to buy now because, at its core, it’s a payments innovator and FinTech disruptor that’s completely democratized finance.
Block’s roots are in serving micro-merchants and small businesses with hardware products such as its revolutionary credit-card reader, making credit card and contactless payments more accessible for small businesses. Block has also provided software for point-of-sale and back offices to manage inventory and other tasks.
Recently, Block has expanded its software offerings to focus on invoicing, payroll and marketing as it targets larger businesses in various industries.
While the Cash App may hold the key to SQ’s upside, the foundation of Block’s success is operating “an ecosystem of ecosystems.” With next-gen FinTech solutions for merchants and consumers of all shapes and sizes, Block’s 41.21% rally since mid-June may only be the start of a furious long-term bull run.
Especially with the stock still trading at a nearly half price discount from its record high.
Tempered Earnings Expectations? Block Has Triple-Digit Net Income Growth Potential and Nowhere to Go but Up
Despite Block’s brutal 2022 thus far and underwhelming Q1 earnings, it remains a top 10 FinTech company that’s outgrowing most of its rivals.
Plus, if you dive deeper into its Q1 earnings, some of its metrics saw impressive year-over-year growth.
- Operating income came in at $1.29 billion, up 34% year-over-year.
- Gross payment volume from merchant customers rose 31% to $43.5 billion.
- Afterpay contributed $92 million of gross profit in February and March, Cash App and Square contributed $46 million of gross profit, and overall gross profit was $1.20 billion, up 25% year over year.
As it sits days from reporting its Q2 figures, expectations are relatively uncertain for the short term.
However, as Cash App continues to grow while Block diversifies and integrates its ecosystems, Block is in an advantageous position. Primarily if it continues to utilize Afterpay to gain a foothold in the skyrocketing BNPL industry.
July’s announcement that Afterpay teamed up with omnichannel beauty retailer Sephora to offer customers BNPL services is a good start for a tremendous growth trajectory.
First of all, Block’s earnings are expected to turn positive in the coming year and grow from ($0.79) to $0.07 per share.
Second, Block’s net income growth is forecast to grow 200.9% and average 96.8% over the next five fiscal years.
Third, Block’s revenue is projected to have a 59.5% 5-year CAGR.
These factors explain why Block is one of the best stocks to buy now.
Profitable and Surprisingly Undervalued
Block operates with a strong 28.7% gross margin and trades -46.92% below its all-time highs.
That fact alone makes Block look deeply undervalued despite its recent uptrend.
But a deeper dive into its historical P/E ratio makes the SQ stock look awfully cheap for the long term.
Back in April 2022, Block’s trailing P/E was as high as 413x. Today, it trades with a forward P/E of 91.0x that’s expected to average 38.3x over the next five fiscal years.
Moreover, its trailing price-to-sales of 2.8x and forward price-to-sales of 2.6x are quite cheap for a company with Block’s growth ambitions.
While these figures at face value may look expensive to overly critical value investors, you have to understand Block’s industry. This isn’t a utility company or an oil stock. As compared to its history, Block right now is ridiculously cheap and unequivocally one of the best stocks to buy now.
A STRONG BUY With a 50+% Upside
According to TipRanks, SQ is a STRONG BUY. A whopping 37 Wall Street analysts offered 12-month price targets for SQ in the last 3 months. Of these 37, an overwhelming majority (29) rated the stock a BUY. The stock currently has a high price target of $175.00, a low of $64.00, and an average of $120.97. The average price target represents a 52.95% upside from August 2, 2022’s closing price of $79.09.
Throughout June and July, though, several analysts have placed price targets on Block with considerably more upside than its average target.
- Citigroup- $135 price target
- Canaccord Genuity Group- BUY rating and $150 price target
- Credit Suisse Group- OUTPERFORM rating and $170 price target
SQ’s year-to-date low and high are $56.01 and $165.33, respectively.