William Blair analysts have made notable adjustments to their fintech stock ratings, upgrading Block (SQ) to Outperform from Market Perform while downgrading PayPal (NASDAQ:PYPL) to Market Perform in a note Thursday.
Block's Upgrade: William Blair's optimism for Block stems from anticipated growth in the second half of 2024. They foresee "accelerating second half 2024 Square GPV, gross profit, and EBITDA growth," driving a significant positive re-rating for the stock.
The analysts acknowledge that Block's stock performance has been underwhelming over the past year, down 4.5% compared to the S&P 500's 25.8% gain.
However, they believe the concerns about Square's ecosystem share losses, which accounted for 40% of gross profit, are set to diminish. They argue that Square's 8% first-quarter GPV growth, which lagged behind Clover's 19%, will improve significantly in the latter half of 2024.
Several factors contribute to this positive outlook: improved execution, simplified merchant onboarding, new vertical solutions, and enhanced capabilities like Tap-to-Pay on iPhone.
Additionally, they believe CEO Jack Dorsey's renewed focus is injecting new energy into the company. "Cash App continues emerging as an important neobank leader," and with new monetization strategies like short-term loans, Block is poised for growth.
Furthermore, robust expense management drove first-quarter 2024 EBITDA margin to 33.7% of gross profit, up from 21.5% last year. William Blair expects this trend to continue, supporting their bullish stance on Block.
PayPal's Downgrade: In contrast, PayPal has been downgraded to Market Perform due to concerns about "limited TAM upside, growing competition, and lack of UC strategy."
Despite PayPal's significant user base of roughly 220 million monthly active accounts and 30 million-plus accepting merchants, the analysts see more challenges than growth opportunities.
Increased competition and a lack of significant levers to boost organic revenue growth or transaction dollar margin are primary concerns.
While they commend new CEO Alex Chriss and initiatives like PayPal Complete Payments and renewed Venmo monetization efforts, William Blair remains cautious about PayPal's ability to navigate the competitive fintech landscape effectively.
Overall, William Blair's updated ratings reflect a more favorable outlook for Block, driven by expected improvements and strategic enhancements, while expressing concerns about PayPal's competitive positioning and growth prospects in the evolving fintech market.