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Block And PayPal: The Market Is Dead Wrong

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The stock market has taken a pessimistic view of Block (NYSE: SQ) and PayPal (NASDAQ: PYPL), but is this assessment accurate? These fintech giants are currently trading at unusually low levels, presenting limited downside risk and immense potential for long-term revenue growth and improved profitability. To put things in perspective, just two years ago, PayPal’s stock was valued at $300, but it has now plummeted to around $63, marking an 80% drop from its all-time high. Block has seen a similar decline, with its stock plunging from a peak of $290 to around $50, a staggering 82% decrease.

So, what exactly is happening with these companies? Are they facing financial troubles? Have they been engaging in questionable accounting practices? Are their revenues collapsing, leading to decreased profitability? The answer to all these questions is a resounding no. The true issue lies in the fact that during the previous bull market, Block and PayPal became overbought and overvalued. However, the pendulum has swung too far in the opposite direction, resulting in these companies being significantly oversold and undervalued at present.

While concerns surrounding slow growth, higher interest rates, increased competition, and other factors are valid, they are temporary in nature. Both Block and PayPal, as leading players in the fintech industry, are bound to stabilize, rebound, and experience substantial growth in the years to come. As Benjamin Graham famously said, the market acts as a voting mechanism in the short term but as a weighing machine in the long run. Therefore, the future prospects of these industry giants should warrant a much higher valuation.

The Curious Case of Block and PayPal’s Stock Charts

When taking a closer look at the stock charts of both Block and PayPal, some intriguing patterns emerge. Both companies experienced significant upward surges during a period of low interest rates and robust growth, ultimately leading to an overbought condition. However, the current tight monetary policy and slow economic growth have subjected these stocks to merciless battering.

Furthermore, Block and PayPal were once valued as high-growth tech companies, but in light of changing market conditions, they are now perceived as low- to no-growth financial stocks. This paradox raises the question: How can the market be so misguided about these firms? Nevertheless, my confidence remains unshaken that as the Federal Reserve implements a more accessible monetary policy in the coming quarters and years, the market will reevaluate these companies as growth tech stocks once again.

Embracing Change: New CEOs for Block and PayPal

Change is in the air for both Block and PayPal, as new CEOs step into the spotlight. While Alyssa Henry played a key role in transforming Block into a software-oriented technology company, it has become clear that she is not the right individual to lead Square. Block, which encompasses Square as a significant component, does not suffer from any structural issues. The company’s fundamentals are solid, boasting a healthy balance sheet with approximately $5.8 billion in cash and short-term investments. Despite this, Block’s stock has nosedived to levels not seen since 2018, marking an 82% decline from its all-time high.

This puzzling situation has prompted the inevitable: a management shakeup. Jack Dorsey, the co-founder of Square and Block’s largest shareholder, with a 9% stake, will assume the role of CEO at Square. With significant shareholders such as Vanguard, Blackrock, and FMR, Block is poised to become more efficient and potentially see a surge in profitability under Dorsey’s leadership. This positive development bodes well for Block’s stock.

In the case of PayPal, a new CEO, Alex Chriss, is set to take the reins as Dan Schulman steps down after nearly a decade at the helm. Schulman’s focus on political issues has veered off course from PayPal’s core business objectives, and his departure presents an opportunity for the company to refocus on generating profits for shareholders. Alex Chriss, who arrives with an impressive track record from his previous role at Intuit, adds valuable expertise and leadership to guide PayPal forward. With Chriss at the helm, a turnaround for PayPal is on the horizon.

Valuation Discrepancy: Block and PayPal Offer Bargain Prices

Both Block and PayPal are currently trading at dirt-cheap valuations. Although Block’s market cap has dwindled to a mere $30 billion, it is projected to generate approximately $21.5 billion in revenues this year alone. Additionally, Block has considerable revenue growth potential, with sales estimated to reach $24-25 billion by 2024.

As a growth-oriented company, Block’s valuation at only 1-1.5 times forward sales is astonishingly cheap. Typically, a company like Block would command a valuation of 2-3 times its sales. Moreover, during the previous bull market, Block’s valuation stretched even further. These factors indicate that Block’s market cap could soar to $50-75 billion in the next 1-2 years, translating to a 75-150% upside from its current stock price.

When it comes to earnings per share (EPS), Block is expected to witness rapid growth as it focuses on cost-cutting measures and improving profitability. Next year, EPS could reach $2.50-3, exemplifying a modest forward price-to-earnings (P/E) ratio of 16.5-20. Moreover, Block has a history of surpassing revenue and EPS estimates, further bolstering its prospects for outperformance in the future.

As for PayPal, its potential lies in a different area – efficiency and profitability. While the company achieved a beat rate of approximately 5% on TTM consensus EPS estimates, this occurred during a challenging macro environment and a low point for PayPal. As the turnaround process continues, the conclusion of the economic slowdown and a more accessible monetary environment will likely translate into improved growth and earnings for PayPal. The consensus EPS estimates for the next twelve months stand at $5.30. With a conservative estimate of a 5% beat rate, PayPal’s EPS could amount to $5.57. The company’s forward P/E multiple currently hovers around 10-11, signaling a dirt-cheap valuation.

Therefore, it is crucial to remember the growth potential of these undervalued stocks. Block and PayPal offer significant value to investors and are poised to deliver substantial returns.

The Future Outlook: Where Block and PayPal Could Be in the Coming Years

Looking ahead, there are promising financial projections for both Block and PayPal:

Block’s Financial Projections:

Year 2024 2025 2026 2027 2028 2029 2030
Revenue (B) $25 $29 $33 $37 $42 $47 $53
Revenue Growth 14% 15% 14% 13% 13% 12% 12%
EPS $2.75 $3.50 $4.48 $5.69 $7.17 $8.96 $11.11
EPS Growth 38% 27% 28% 27% 26% 25% 24%
Forward P/E 25 27 28 28 27 26 25
Stock Price $88 $121 $160 $201 $242 $289 $340

PayPal’s Financial Projections:

Year 2024 2025 2026 2027 2028 2029 2030
Revenue (B) $33 $36.5 $39.8 $43.4 $47.3 $51.5 $55.6
Revenue Growth 10% 10% 9% 9% 9% 9% 8%
EPS $6 $7.20 $8.50 $10.03 $11.73 $13.61 $15.65
EPS Growth 20% 20% 18% 18% 17% 16% 15%
Forward P/E 15 17 19 20 19 18 17
Stock Price $108 $145 $191 $235 $259 $282 $305

These projections are somewhat conservative, assuming a sales growth rate of 10% or less for both Block and PayPal. However, in a more bullish scenario, both companies could exceed these expectations and achieve higher growth rates. Additionally, the forward P/E ratios utilized here are conservative estimates, and in a more optimistic case, these ratios could expand significantly, leading to significantly higher stock prices.

Risks to Consider

While the long-term outlook for Block and PayPal appears optimistic, there are still risks to be aware of in the near term. The economy may remain sluggish for a longer period than expected, resulting in extended periods of depressed stock prices. Competition in the fintech industry is also a concern, and both companies must continually innovate to maintain their market share. Additionally, there is a risk of a more prolonged turnaround for PayPal, and Block’s profitability may continue to be hampered by high expenses. It is essential for investors to weigh these factors and other potential risks before making any investment decisions.

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