PayPal’s shares experienced a decline following disappointing margin outlook in their quarterly earnings results.
While the earnings were not catastrophic, the focus shifted towards margin contraction.
A comparison was made between PayPal and rival Block in terms of free cash flow, gross margins, and overall profitability.
Despite PayPal appearing to be the better play in terms of fundamentals, it lags behind Block in valuation.
It was noted that Block extensively relied on non-GAAP adjustments to report growth despite weakening metrics, which was highlighted by Hindenburg.
On the other hand, an analyst covering both companies mentioned that investors may be favoring Block due to its perceived innovation.
Jack Dorsey’s involvement in Block and the creation of a more viral product were factors mentioned in this regard.
The argument for innovation is further supported by Block’s expected faster revenue growth compared to PayPal.
The article also mentioned the ongoing debate surrounding the valuation of profitability versus revenue growth in the fintech space.
Additionally, the article touched upon the notion of commodity services in the industry.
As PayPal, being an incumbent, faces the challenge of losing market share rather than gaining it in a saturated market, this could explain part of the valuation difference.
The report indicated that three-quarters of e-commerce vendors still use PayPal’s services, but this indicates potential market share to lose rather than gain.
The article also discussed the concept of commoditization in the fintech industry, using examples such as the rise of “buy now, pay later” services and the entry of Zelle into existing banking apps.
The author suggested that the decreasing valuation of PayPal over time could be attributed to the commoditization of such services.
The rise of alternatives raises questions about the future valuation prospects of PayPal and whether it can ever reach the levels of Block.
Overall, the article focused on PayPal’s disappointing margin outlook, its comparison to rival Block, the debate between profitability and revenue growth, and the challenges posed by commoditization in the fintech industry.