Which Fintech Stock is the Best to Buy for 2023 – PayPal or Blockchain?

According to Adroit Market Research, the financial technology (fintech) market is expected to have a compound annual growth rate (CAGR) of more than 20% through 2030, reaching $700 billion compared to $100 billion now. Several third-party research groups similarly forecast high growth for fintech in the coming years, which is good reason for investors to consider PayPal Holdings (PYPL 0.67%) and Block (SQ 0.49%).

Let’s take a look at which is the best stock for 2023 and beyond. My answer may surprise you.

1. PayPal stock has never been so cheap

PayPal is a pioneer in the fintech space. And with 432 million active accounts, it is also one of the largest players.

Over the past four quarters, PayPal has generated nearly $5.7 billion in free cash flow (FCF), which is a measure of profitability. Trading at a current market cap of $78 billion, this means it trades at just 14 times FCF – the cheapest it has been since it was spun off eBay in 2015. But more context unlocks the truly impressive value proposition for PayPal investors today.

PYPL Price for free cash flow data by YCharts

In recent years, PayPal management has focused on expanding the business into additional fintech services, with limited success. And unfortunately, this has held FCF back a bit lately, as the chart below shows. But with a renewed focus on its core strengths, PayPal is starting to live up to its full FCF generation potential, and I expect it to continue to improve and the valuation to look all the more attractive.

PYPL free cash flow per share data by YCharts

Shareholders have already been told about PayPal’s game plan for 2023. In the conference call to discuss third quarter 2022 financial results, PayPal CFO Gabrielle Rabinovitch said: “Returning capital to our shareholders continues to be our top priority from a capital allocation standpoint, and I believe that will continue to be.”

So far in 2022, PayPal has spent nearly $1 billion per quarter on share buybacks and expects to maintain a similar pace in 2023. This equates to more than 1% of outstanding shares per quarter.

PayPal isn’t the high-growth opportunity it once was — it’s only forecasting 7% year-over-year revenue growth in the current quarter. And it’s only grown year-to-date revenue by 9% from the comparable period in 2021. However, with consistent share buybacks, it’s possible for PayPal to grow revenue Per share with a double-digit percentage, which should be enough to beat the market in 2023 and beyond.

2. Block storage is also cheap, with a catch

Unlike PayPal, Block is still an opportunity for higher growth, mainly thanks to the Cash App ecosystem. With the Cash App, users can invest, transfer money to other Cash App users and more. They can also do more traditional banking things like direct deposit their paychecks and get a debit card.

The Cash App Card is important fuel for Block’s fire. In the third quarter of 2022, cardholders reached 18 million and accounted for half of all cash flows to the business. This is important. When money is in the system, it is highly likely that users will stay and spend the money inside the ecosystem.

Block’s management focuses on gross profit. It is not a perfect valuation. But let’s look at it from this perspective for the sake of argument, since this is management’s emphasis.

Block has $5.5 billion in trailing 12-month gross profit and has a market capitalization of $36.2 billion. This valuation of just under 7 times gross earnings is historically a cheap valuation for this company. And gross profits are still growing rapidly, up roughly 34% through the first three quarters of 2022 compared to the comparable period in 2021. Steady growth in the Cash App ecosystem is driving these gains.

As mentioned, Block has higher growth than PayPal, and I think Cash App has a lot more space from here. Also, from certain perspectives, Block looks like a cheap stock. However, Block has more uncertainty than PayPal – in 2023 it will continue to funnel money into projects such as the music platform Tidal and cryptocurrency, both of which have uncertain payouts.

Here’s another problem: After the buy-now, pay-later company Afterpay, Block has an astounding $11.6 billion of goodwill on its balance sheet. Considering Block bought Afterpay at a time when valuations were running hot, it is very likely that they will have to write off some of this goodwill in 2023, resulting in a big hit to profitability. It will be a non-cash cost, but the market will surely not like it.

For everything discussed here, I would say that PayPal stocks and blockchain stocks are both great opportunities for 2023 and beyond, but for different sets of investors. If you are an investor who wants respectable upside with limited downside risk, I would suggest buying PayPal. But if you’re willing to take on more uncertainty for a stock with more upside potential, Block may be the stock for you.

You may not have expected an answer like this. But this is often true of investing: the better investment opportunity sometimes comes down to your personal situation, as is the case with PayPal and Block, in my opinion.