Fountainheadinvesting

Fountainhead Investing

Menu
Menu

Tag: Payment processing

Categories
Fintech

Toast Inc (TOST): A Potential Pullback Opportunity for Investors

Toast (TOST) $23

Positives

Focused on restaurants – therefore scale in that segment helps in a commodity market, where they can compete on price.

One Stop Shop for restaurants, provides several financial/accounting/CRM/Marketing tools besides payment processing, reducing the need to go to several vendors. These have a strong attach rate and will be a key growth catalyst.

Non-GAAP profits with operating margins improving, hope to be GAAP profitable by 2025.

Good growth prospects – 23-25% revenue growth, priced at 2.5x sales, reasonable.

Negatives

Commodity, crowded business with a large number of competitors, little product differentiation, many compete on price alone.

Will find it difficult to perform outside its niche.

The stock is already up more than 60% from its low of $14, so expect some pullback.

This should be worth looking at $18-$20, I think the appreciation from here may be limited

Categories
Fintech

PayPal at $58: Is This Aging Incumbent a Value Trap or Opportunity?

source:paypal

Paypal (PYPL) $58 HOLD

Paypal took a beating of 8%, following lackluster results and guidance. Overall the stock has been a chronic underperformer with a negative 30% return in the last 5 years, and negative 24% in the past year. And this too in a booming market.

Most of the underperformance was because of overpricing, Paypal routinely fetched a P/E multiple of over 30, and a P/S ratio of over 6, in the Cathy Woods, buy everything tech, pandemic stimulus era. But with 5 year earnings and revenue growth slowing to the mid teens, the luster wore off, and in 2023, Paypal grew earnings by only 8% and recurring operating income by 11%.

What’s Ahead: In 2024, Adjusted EPS will be flat at $5.1 per share, while revenue is expected to grow 6.5%. Similarly 3 year forecasts are for only 7% revenue and earnings growth. Again, very mediocre growth.

Compared to its growth, Paypal is not unreasonably priced at 12X, Adjusted forward earnings ($60/5.1), and the PEG (Price Earnings / Growth) is 1.7 (12/7). Not that expensive. Block (earlier Square) (SQ) at $67, quotes 40x adjusted earnings, but grows faster at 30% – its PEG is actually lower at 1.33 (40/30)

In my opinion, Paypal’s stock could grow from here, the price is close to rock bottom, but the bigger problem is the whole payment processing sector is a commodity business, there is no product differentiation and Paypal has a lot of competition not just from Square, there’s Zelle, Stripe, Apple Pay and so on… the list gets bigger. It’s like the older, aging incumbent. Stock returns even from $58 could be just about the market average or we could get stuck in a value trap.

There is a new sheriff in town, let’s see how the new CEO Alex Chriss performs, and take another look next quarter.

Categories
Fintech

Block Inc (SQ) at $66: HOLD, Profitability Focus Could Unlock Value

source:

Block Inc (SQ) $66 Previously known as Square. HOLD

Square has underperformed the market in the last 5 years in a big way, with a negative total return of 10%. When it started, it showed a lot of promise in a cyclical commodity industry of payment processing with the ease of installation, mobile applications and payments, good easy user interface, which differentiated it from the crowd. The Cash app also promised a good deal, with solid growth for years, and is now being well monetized. But the focus on crypto turned off investors from these strengths, especially when Block’s crypto trading account is heavily exposed to crypto performance and pricing. For example, out of $16Bn in 9 months of last year’s revenue, $7Bn was crypto trading VOLUME with a cost of $6.86 Bn with only $140Mn in gross commissions. Institutional investors and analysts like me object to such a loose interpretation of revenue accounting – Square is not a $16Bn company it is a 9Bn company. Secondly, out of the 25% revenue growth in the last 9 months, crypto volume grew 30% compared to the rest of the company’s 21% growth.

The rest of the payment processing business is good, but not GAAP profitable and for a company that has been around for 15 years, that is a sticking point – Stock Based Compensation for the last nine months was almost $1BN so that is going to take a while. However, adjusted operating profits are over $500Mn so that’s a plus and operating cash flow was $450Mn, decent but only 5-6% of revenues.

That said, this company has a lot of scope, especially in its cash application, which now has $22Mn MAU’s Monthly Active Users, and is growing well. Management has promised operating cost discipline in their last call, they have to – there are no significant, sustainable long term competitive advantages in payment processing – it’s a cookie cutter business, with some new wrinkles every few years.

Bottom Line – We saw how well Meta got rewarded last week with their focus on profitability, so if Block continues to execute and focus on it – this could be a surprise and a good gain. The stock has moved up more than 70% from its 52 week low of $39. The valuation is not bad with a P/E of 25x adjusted earnings with adjusted EPS growth of 25%

I would wait till I saw further signs of good execution.