Before the massive market rotation and tech-heavy selling, specifically in high beta and richly valued stocks, fintech had been in a multi-year secular growth trend. Recently, high-quality names in the space such as Block (SQ), formally Square, and PayPal (PYPL) have seen their stocks nearly cut in half. Block has come down from $298 to $138 or a 54% drop, while PayPal has come down from $310 to $179 or a 42% drop. All the rage has been about the buy-now and pay-later platforms as a disruptor to the entire payments space. However, Block came through with a $29 billion, all-stock deal to buy Afterpay, a major buy-now, and pay-later platform. Block's acquisition highlights consumers circumventing traditional credit, especially younger buyers, for installment loans. PayPal also offers their version of buy-now and pay-later offering, which showed fantastic growth over the holiday season and a surge of 400% on Black Friday alone.
Both Block and PayPal are firmly in the buy-now and pay-later space while also enabling businesses at the point of sale, analytics, peer-to-peer payments via Venmo (PayPal) and Cash App (Block), small business lending, cryptocurrency transactions, and support traditional credit card integrations into their platforms. Block and PayPal offer end-to-end financial solutions for businesses and consumers while powering the next generation of financial technology. These financial technology companies are creating additional revenue verticals while addressing unmet needs in the financial services space. Both Block and PayPal may offer long-term growth at very reduced valuations due to the tech-heavy selling, when factoring in their end markets are current growth rates.
Some Recent Numbers
PayPal's buy-now and pay-later offering, "Buy in 4", saw a 500% increase on Black Friday compared with a year earlier as PayPal gains market share in this fast-growing space. "We saw a 400% year-on-year rise on our volumes going through 'buy now, pay later' this past Black Friday," PayPal CEO Dan Schulman said. "It's booming right now." He added that more than 9 million people have used its service. "We had more than 1 million first-time users for the first time ever in the month of November," Schulman said. "It's not just popular but accelerating in popularity." Schulman said the scale of PayPal's customer base meant they could offer the service responsibly. "We have 400 million-plus people on our platform. We know consumers, and we know merchants, and we know when someone can responsibly borrow," Schulman said. "We have one of the highest approval rates and one of the lowest default rates in the industry."
In Q3 2021, PayPal added 13.3 million accounts, bringing total active accounts to 416 million, up 15%. 4.9 billion payment transactions, up 22%, with Merchant Services volume growing 31%. Venmo processed approximately $60 billion, growing 36% with 44.2 payment transactions per active account on a trailing twelve-month basis, growing 10%. PayPal has cash, cash equivalents, and investments totaling $20.0 billion as of September 30, 2021. Generated cash flow from operations of $1.51 billion, up 15%, and free cash flow of $1.29 billion, up 20%. PayPal is teaming up with Amazon to enable customers in the U.S. to pay with Venmo at checkout. Starting next year, customers will be able to make purchases on Amazon.com and the Amazon mobile shopping app using their Venmo accounts. In October, PayPal closed the acquisition of Paidy, a leading two-sided payments platform and provider of buy now, pay later solutions in Japan for approximately $2.7 billion in cash. The acquisition of Paidy will enhance PayPal's capabilities and relevance in the domestic payments market in Japan, the third-largest e-commerce market in the world, complementing the company's existing cross-border e-commerce business in the country. In addition, PayPal announced plans to start rolling out PayPal Savings to customers in the U.S.
Block's recent quarterly earnings saw total net revenue of $3.84 billion in the third quarter of 2021, up 27% year over year. Excluding bitcoin, total net revenue in the third quarter was $2.03 billion, up 45% year over year. Gross profit was $1.13 billion in the third quarter of 2021, up 43% year over year. Transaction-based revenue was $1.30 billion in the third quarter of 2021, up 40% year over year, and transaction-based gross profit was $543 million, up 35% year over year. In addition, we processed $45.4 billion in GPV in the third quarter of 2021, up 43% year over year. Subscription and services-based revenue were $695 million in the third quarter of 2021, up 55% year over year, and subscription and services-based gross profit was $563 million, up 48% year over year.
Again, these companies are growing rapidly and clearly seeing widespread adoption across their financial solutions with cryptocurrency and buy now-pay later, serving as long-term catalysts.
Pay Now-Pay Later Trends
Buy now and pay later platforms allow customers to make purchases over time in installments. This payment option is growing in popularity with younger generations in an effort to save money as opposed to using traditional credit cards. The buy now and pay later trend is dominated by Affirm, Klarna, PayBright, and AfterPay, which Block is acquiring in a $29 billion, all-stock deal. As of June 30, Afterpay served more than 16 million customers and roughly 100,000 merchants. Apple (AAPL) is teaming up with Affirm Holdings' PayBright for a buy now and pay later program for Apple devices bought in Canada. This space is growing via younger generations such as millennials and Gen-Zs, who are turning to these buy now and pay later platforms instead of traditional credit cards with high-interest rates.
Buy now and pay later platforms allow users to make large purchases like a computer without having to come up with the entire cost density upfront. They typically let users pay in four installments over a six-week period. Most also offer a companion app or web browser plug-in to equip payment with the merchant's website. User accounts are typically linked to a debit card or bank account, where payments are taken out automatically. As a user makes more on-time purchases with the platform, their spending limit grows. Many platforms don't charge interest to the customer, making money mostly off of retailer fees and some late fee charges.
Bitcoin Adoption
Both Block and PayPal have enabled cryptocurrency transactions that will rival Coinbase (COIN) in the cryptocurrency space. This is a new inroad for Block and PayPal; however, based on their latest earnings reports, the adoption has been fantastic. As cryptocurrency becomes more ubiquitous and liquid, these platforms will see tremendous growth and userbase expansion. Last year, PayPal became one of the first major mainstream financial companies to embrace cryptocurrencies when it enabled customers to buy, sell and hold certain digital coins in its wallet. "But what's really interesting to me is can crypto or digital forms of currency add incremental utility to payments - things like programmable money, things like NFTs (non-fungible tokens), things like some Defi (decentralized finance) applications."
PayPal expanded cryptocurrency product offerings, launching the ability to buy, hold, and sell cryptocurrency in the U.K. and rolling out cash Back to Crypto, a new way for Venmo Credit Card customers to automatically purchase cryptocurrency from their Venmo account using cashback earned from their card purchases.
Business Lending
Given proprietary business analytics, Block and PayPal have also launched direct business lending to their small business clients. This lending is de-risked relative to traditional bank lines of credit as both Block and PayPal have direct insights into a company's real-time cash flows and financials (i.e., end markets, customers, recurring payments, seasonality, etc.). In addition, these analytics provide powerful tools to enable lending based on risk factors associated with financial activity across their financial solutions. As a result, the default rate is lower than traditional bank lending while providing more revenue for PayPal and Block via business loans.
Conclusion
Block (SQ) and PayPal (PYPL) have seen their stocks nearly cut in half by 54% and 42%, respectively. Both Block, formally Block and PayPal are at the center of financial technology via buy now and pay later solutions, digital payment solutions, point of sale, analytics, peer-to-peer payments via Venmo (PayPal) and Cash App (Block), small business lending, cryptocurrency transactions and support traditional credit card integrations into their platforms. These companies are growing rapidly and clearly seeing widespread adoption across their financial solutions with cryptocurrency and buy now and pay later, serving as long-term catalysts. The buy now and pay later platforms that allow customers to make purchases over time in installments are growing in popularity. Block is acquiring AfterPay in a $29 billion, all-stock deal, doubling down on the buy now-pay later trends. PayPal already offers its own version of buy now-pay later solution and has seen tremendous growth over the holiday season. Furthermore, PayPal acquired Paidy, a leading two-sided payments platform and provider of buy now, pay later solutions in Japan, for approximately $2.7 billion.
Both Block and PayPal have enabled cryptocurrency transactions, which is a rapidly growing space that will rival Coinbase in the cryptocurrency market. Block and PayPal have also launched direct business lending to small business clients. Their financial analytics provide powerful tools to enable lending based on risk factors associated with financial activity across their financial solutions. Given all the end markets, new revenue verticals, and total addressable market across their financial solutions, both Block and PayPal offer great growth at a very reduced valuation for the long-term investor.
Noah Kiedrowski
INO.com Contributor
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