Fintech has been a multi-year growth story that’s still in its early innings, with Square (SQ) and PayPal (PYPL) leading the pack. Square recently announced a $29 billion, all-stock deal to buy Afterpay, a buy now and pay later platform. Square’s acquisition highlights consumers circumventing traditional credit, especially younger buyers, for installment loans. Payment players and financial technology, notably PayPal, also offer their own version of buy now and pay later. Both Square and PayPal enable businesses with a point of sale, analytics, peer-to-peer payments via Venmo (PayPal) and Cash App (Square), small business lending, cryptocurrency transactions, and support traditional credit card integrations into their platforms. Square 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 Square and PayPal may offer long-term growth at reasonable valuations when factoring in their end markets are current growth rates.
Latest Earnings and Growth
The recent earnings reports by Square and PayPal highlight the massive trends and growth trends in the financial technology space. Square’s profit increased 91% from a year ago, which marked a record quarterly growth rate for the payments company. Cash App profit was up 94%, while seller jumped 85% from a year ago. Net revenue excluding bitcoin came in at $1.96 billion for the quarter, an 87% rise year-over-year. PayPal added 11.4 million net new active accounts for a total of 403 million active accounts. Revenue grew 19% year-over-year. Total payment volume grew 40% to $311 billion, while the Venmo app, which began supporting cryptocurrency services in April, saw payment volume grow 58% to $58 billion. 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 Klarna, PayBright, and AfterPay, which Square is acquiring in a $29 billion, all-stock deal. As of June 30th, Afterpay served more than 16 million customers and roughly 100,000 merchants. In addition, Apple (AAPL) is teaming up with Affirm Holdings Inc. (AFRM) 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 turn 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 Square and PayPal have enabled cryptocurrency transactions that will rival Coinbase (COIN) in the cryptocurrency space. This is a new inroad for Square and PayPal; however, the adoption has been fantastic based on their latest earnings reports. As cryptocurrency becomes more ubiquitous and liquid, these platforms will see tremendous growth and userbase expansion.
Business Lending
Square and PayPal have also launched direct business lending to their small business clients given proprietary business analytics. This lending is de-risked relative to traditional bank lines of credit as both Square and PayPal have direct insights into a company’s cash flows and financials (i.e., end markets, customers, recurring payments, seasonality, etc.). 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 the company via business loans.
Conclusion
Both Square and PayPal are at the center of financial technology via digital payment solutions, point of sale, analytics, peer-to-peer payments via Venmo (PayPal) and Cash App (Square), 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-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. Square 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 the buy now-pay later solution. Both Square and PayPal have enabled cryptocurrency transactions, which is a rapidly growing space that will rival Coinbase in the cryptocurrency market. Square and PayPal have also launched direct business lending to their 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 Square and PayPal offer growth at a reasonable valuation for the long-term investor.
Noah Kiedrowski
INO.com Contributor
Disclosure: The author holds shares in AAPL, AMZN, DIA, GOOGL, JPM, MSFT, QQQ, SPY, and USO. He may engage in options trading in any of the underlying securities. The author has no business relationship with any companies mentioned in this article. He is not a professional financial advisor or tax professional. This article reflects his own opinions. This article is not intended to be a recommendation to buy or sell any stock or ETF mentioned. Kiedrowski is an individual investor who analyzes investment strategies and disseminates analyses. Kiedrowski encourages all investors to conduct their own research and due diligence prior to investing. Please feel free to comment and provide feedback, the author values all responses. The author is the founder of www.stockoptionsdad.com where options are a bet on where stocks won’t go, not where they will. Where high probability options trading for consistent income and risk mitigation thrives in both bull and bear markets. For more engaging, short duration options based content, visit stockoptionsdad’s YouTube channel.
