Why PayPal's 'perplexing' stock just got downgraded, while Block's got upgraded

By Emily Bary

A William Blair analyst thinks PayPal faces 'intractable competitive challenges' from Apple

William Blair analyst Andrew Jeffrey is switching up his ratings on prominent financial-technology stocks.

He upgraded Block Inc. shares (SQ) to outperform from market perform on Thursday, while making the opposite move on PayPal Holdings Inc. shares (PYPL). Both stocks have posted declines over the past 12 months and thus trailed the S&P 500 SPX, but Jeffrey sees better days ahead for Block's stock.

"First, we contend Square's execution is steadily improving, marked by simpler merchant onboarding and new vertical solutions, such as in hospitality," he wrote. Square is Block's merchant business, and Chief Executive Jack Dorsey has taken over leadership of the unit. In doing so, he's "injecting new energy into a business that had become complacent, despite technology leadership," by Jeffrey's assessment.

The prospect of improved trends at Square is critical for Block's stock, as Jeffrey thinks concerns about market-share losses have driven the stock's recent underperformance.

"These concerns have been justified, in our view, evidenced by Square's 8% first quarter 2024 gross payment volume (GPV) growth, which meaningfully lagged Clover's (backed by Fiserv) 19% and was just in line with Visa," he wrote. "However, we believe this spread is currently maximized, set to close measurably in second half 2024 and beyond."

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While Fiserv Inc.'s (FI) Clover has turned into the leader for point-of-sale solutions serving smaller businesses, Jeffrey sees catch-up potential for Square: "This is a non-consensus view that we contend is not currently reflected in the stock," he said.

As for PayPal, he worries about "increasing competition on multiple fronts and a paucity of levers to accelerate organic revenue growth and/or transaction dollar margin."

That's as he deems PayPal "one of the most perplexing names" among the stocks he covers. The company has a huge base of about 220 million monthly active accounts, but it also faces what Jeffrey sees to be "intractable competitive challenges" from Apple Inc. (AAPL).

Read: PayPal's competitive challenges are back in the spotlight, BofA says

"Apple Pay's native app status on the company's iPhone creates an intrinsic competitive advantage, in our opinion, particularly as U.S. contactless payment adoption rises," he wrote.

Visa said on its last earnings call that adoption of contactless payment in the U.S. is up to half, and Jeffrey expects that number to eventually move closer to the global adoption rate outside the U.S. of almost 80%.

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"We think this is important because consumers will be inclined to use top-of-wallet cards for card-present payments, and this behavior will translate into e-commerce," he said.

PayPal shares are near flat in Thursday morning trading, while Block's stock is down about 1%.

-Emily Bary

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07-18-24 1045ET

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