PayPal Holdings Inc. and Block Inc. shares are each controversial on Wall Street, and Wells Fargo analyst Andrew Bauch expects they’ll stay that way.
He initiated what he called the “battleground” names with equal-weight ratings late Monday, expressing skepticism that either one will be able to drive enough of a turnaround to appease investors.
“Checks suggest [PayPal] is increasingly aggressive in capturing and defending share,” Bauch wrote. “We question whether this approach can deliver margin expansion and revitalize the top line simultaneously.”
See also: PayPal skeptics may be making a crucial mistake about the stock, Barclays says
PayPal
PYPL,
has been picking up market share in “low-complexity segments” and seeing success, according to Bauch, but he worries about the impact on margins. He models that the company will grow adjusted operating income at a high-single-digit rate in 2024 and 2025, whereas consensus expectations call for low-double-digit increases.
“Despite share underperformance, we have yet to see convincing evidence that PYPL’s fundamental erosion has ended,” he wrote, while setting a $55 target price on shares. “That said, we suspect deteriorating trends are priced into expectations and sense that buy-side is highly negative.”
The Ratings Game: PayPal versus Block: Here’s HSBC’s preferred stock play on a fintech turnaround
As for Block
SQ,
he notes that the company has “an impressive record of innovation,” but he doesn’t see “sufficient evidence” that the company will be able to notch beat-and-raise quarters consistently, especially with buy-side estimates so optimistic.
Block’s “thematic story continues to evolve … with management’s shifting focus to sustainable profitable growth defined by medium-term aspirations for ‘Rule of 40′” performance, based on the sum of its gross-profit growth and adjusted-operating-income margin, he wrote.
“That said, investors are justifiably skeptical,” Bauch noted, as the company has had minimal success driving operating income in the past, faces stiff competition in its seller business and could require “an ongoing conveyor belt of investments” to maintain growth rates for the Cash App mobile wallet.
“Valuation is core to the bull thesis, which is typically less compelling to uninvolved investors than a fundamental case,” Bauch continued. “The bear case appears equally unattractive, as valuation is approaching levels suggesting that most of the downside fears come to fruition.”
Bauch established a $45 target price on Block’s stock.
See also: Block’s stock has more than 50% upside after a ‘massive pullback,’ BofA predicts
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