Checking in With Payment Stocks – PayPal, Adyen, & Block
Table of contents
The efficient market hypothesis tells us that a stock’s intrinsic value cannot suddenly increase without reason. When the reason is clearly hype, investors might be served to do the unthinkable – engage in a bit of market timing and take some profits. That’s what we did with shares of Desktop Metal (DM) back when we held that firm. Conversely, when shares of a company drop sharply alongside the entire market, they may have become too richly priced over time. Stocks go up the escalator and down the elevator, as they say. If those stocks happen to represent quality companies, then investors can obtain growth assets at a significant discount. Today, pretty much all growth stocks are trading at steep discounts, including the big three payment companies.
The Performance of Payment Stocks
One fintech trend receiving loads of attention is payments, a thesis we wrote about in a late 2020 piece titled Square Stock vs. PayPal Stock vs. Adyen Stock. Here’s how these three firms have performed since that piece was published on October 14th, 2020:
It’s impossible to comment on share price performance without including a benchmark. Here is the comparative performance of the appropriate benchmark for each stock:
- Nasdaq (PayPal) +0.65%%
- NYSE (Block) +14%
- Euronext 100 (Adyen) +19.83%
Now, we can adjust the original returns by the benchmark returns over the same time frame. Here’s what we get.
- PayPal -61%
SquareBlock -69%- Adyen -33%
The returns of Block and Adyen become significantly worse to reflect the opportunity cost of investing in these stocks versus their respective benchmarks. Still, both PayPal and Square appear to be taking a much bigger beating than Adyen which we believe reflects the latter’s geographical revenue diversification which gives it greater resilience.
Fintech ETF Performance
In addition to evaluating relative performance using broad market benchmarks like the NYSE or the Nasdaq, we can take that a step further by looking at how thematic fintech ETFs have been performing. In a previous article titled Global X FinTech ETF or Ark Fintech Innovation ETF?, we looked at two fintech ETFs that can both be used to benchmark our payments stocks against. Here’s how both ETFs have performed over the same time frame used earlier (October 14, 2020 to date).
When we last looked at FINX, the top three holdings were the three big payments gateway providers – Square, PayPal, and Adyen – in that order, which accounted for just over 21% of the ETF’s weighting. Today, their rankings have dropped with Adyen and Square holding 4th and 5th spots while PayPal drops to 12th. Collectively, they account for about 15.7% of the ETF. Note that the movement of these companies within the index is only a function of their changing market capitalizations since FINX is a market cap weighted index. On the other hand, the ARK Invest ETF is actively managed – and also twice as large with an AUM of $1.5 billion – so ARK is able to put selling pressure on these stocks as they change position. And change positions they have. Here’s a look at ARK Invest’s top ten holdings today which now include Adyen:
| BLOCK INC | 11.43% |
| SHOPIFY INC – CLASS A | 8.99% |
| TWILIO INC – A | 8.15% |
| COINBASE GLOBAL INC -CLASS A | 8.14% |
| UIPATH INC – CLASS A | 5.61% |
| ROBINHOOD MARKETS INC – A | 5.51% |
| MERCADOLIBRE INC | 5.32% |
| DISCOVERY LTD | 5.26% |
| ADYEN NV | 4.83% |
| SEA LTD-ADR | 4.52% |
PayPal is nowhere to be found because ARK exited that position in favor of Block for reasons we couldn’t disagree with more – bitcoin exposure.
Block’s Bitcoin Blow Off
Block investors are reaping what the company sowed with its choice to count the bitcoin they’re peddling customers as “revenues.” That means that investors can no longer have a clear view of what’s happening with revenue growth because it’s clouded by a volatile cryptocurrency. As seen below, bitcoin speculation tailed off dramatically once everyone realized becoming an overnight millionaire trading crypto was a pipe dream.
As long as Block counts bitcoin as revenues, it will be difficult for investors to clearly see the real payments growth taking place. Removing bitcoin, we see a 44% growth in Q1-2022 compared to Q1-2021, as opposed to the 21.7% decline in total revenues they reported.
What adds to the confusion is Block recently enabling their Cash App to support bitcoin using the Lightning Network which is what failed to gain traction in El Salvador but may very well have better success in countries where people are less worried about where their next meal will come from. So, we need to separate Block’s bitcoin exposure into three categories:
- FOMO YOLO types trying to speculate their way into a better zip code
- A payments system that uses bitcoin to transact
- The bitcoin on their balance sheet – $220 million invested
The first bullet point is not something we’re interested in for the same reason we detest Robinhood stock and think MicroStrategy is breaching their fiduciary responsibility to investors. Speculating of any type creates volatility and adds no value.
Regarding bitcoin as a payment mechanism, using bitcoin to pay for things in El Salvador is fun to post on YouTube but the inefficient awkwardness gets old after transaction number three. As for Visa contactless payments, they’re now ubiquitous. Even in some of Europe’s poorest countries you’ll see people whipping out contactless cards and paying for things. From toilets in train stations to coffee vending machines, most places now accept this convenient payment method. Anyone living in Hong Kong understands just why people love Visa contactless so much. “Beeping” a card is just so much quicker and convenient.
So, that’s great Square is breaking out Bitcoin Lightning for a cool new payments system, but we’re not convinced it has the legs they think it does. Please feel free to raise objections here, as we would really like to understand the Block bitcoin bull thesis better.
Valuation, Volume, and Diversification
You’ll often see financial pundits refer to “fair disclosure” which is all about showing your investing cards to other people before you offer up opinions. We’re long Adyen right now for reasons we presented 19 months ago that largely surrounded international revenue diversification and valuation. Let’s start by looking at how all three companies stack up today using our simple valuation ratio:
| Market Cap | Annualized Revenues | Ratio | |
| PayPal | 92,099 | 25,920 | 3.6 |
| Adyen | 43,445 | 6,880 | 6.3 |
| Block | 48,672 | 15,840 | 3.1 |
While Adyen would appear overvalued relative to the other two payment firms, we should also consider that Block counts bitcoin speculation as revenues. If we adjust for that, their ratio comes more in line with Adyen at 5.5.
Another key metric to watch is total payment volume which shows just how much money is flowing through their platforms (excluding cryptocurrency speculation). Looking at this number over the past three years shows Adyen with the strongest growth (110%) and Square with the weakest growth (58%):
Block’s name change implies they have a much broader focus than just payments which is why we feel it’s important that investors can easily separate the two. Total payment volume (what Block calls Gross Payment Volume) is one metric we can use to do that.
As for international diversification, PayPal derives just over half their revenues from the United States, a trend that hasn’t changed over the past three years. An overreliance on the American consumer is why we weren’t attracted to Upstart, a company that’s down (checks Bloomberg terminal) -46% after hours right now, probably because of something related to the American consumer. We much rather prefer companies with geographically diversified revenue streams, like Adyen, though their heavy exposure to Europe is suddenly something of a concern for the same reasons UiPath investors are concerned.
Sometimes these decisions come down to a whim. Now that PayPal shares have floated back down to earth, would we consider swapping out our Adyen holding in exchange for a position in the world’s leader in payment gateways? If that’s something we decide to do, Nanalyze Premium annual subscribers will be the first to know.
Conclusion
Sometimes you may not invest in a market leader for any number of reasons. When those reasons change, you may consider swapping out whatever laggard you’re holding with the leader. When there are three major publicly traded players, and you can eliminate one, that leaves just two choices. We’re long and strong on Adyen at the moment, and prior to changing that position to PayPal, we would probably need to better understand the precise differences between the two companies’ business models and growth drivers.
Share
Block P/S = 2.8, but its gross profit increased in Square by 29% and in Cash App 51% as per Q3 results.
SQ market cap: $50B, share price: $83.8. Cash: $5.3B (increased comparing to previous 2 quarters).
TAM: $120B.
SQ is ARK’s no 4 position worth $673M.
Comparing Block and Adyen: they seem to have similar financial data: similar market cap, similar revenue, similar cash.
Block was counting bitcoin sales as revenues last time we checked. Not acceptable.