After a stellar run in the last few years, growth stocks have lost significant momentum since mid-2021. Wall Street remains worried about macroeconomic factors that include interest rate hikes, higher commodity prices, supply chain disruptions, geopolitical tensions, and inflation, resulting in an equity market that is under the pump.
These macro catalysts led to a sell-off in growth stocks over the last six months. For example, fintech stocks such as PayPal (PYPL) and Paysafe (PSFE) are currently trading 72% and 85% below all-time highs, respectively.
Given the massive pullback let’s see which fintech stock between PayPal and Paysafe should be part of your equity portfolio in Q2 of 2022.
PayPal
In 2021, PayPal’s total payment volume or TPV surged over $1 trillion for the very first time. It ended the year with 426 million active accounts making up over 50% of the payment processing vertical. We can see that PayPal has established an economic moat despite an increase in competition in recent years.
PayPal grew sales by 18% year over year to $25.37 billion while adjusted earnings rose by 19% to $4.6 per share in 2021. The company ended 2021 with $16.3 billion in cash and less than $10 billion in debt. Further, PayPal’s free cash flow rose by 38% to $1.6 billion and its operating cash flow grew 31% to $1.8 billion in 2021.
PayPal is forecast to grow revenue by 15.5% to $29.3 billion in 2022 and by 19.5% to $35 billion in 2023. We can see that PYPL stock is valued at a forward price to 2022 sales multiple of 3.3x which is quite reasonable for a growth stock.
PayPal stock is also valued at 18.6x forward earnings and is trading at a discount of 100% compared to consensus price target estimates.
Paysafe
Valued at $2 billion by market cap, Paysafe has increased sales from $1.1 billion in 2018 to $1.48 billion in 2021. The company processed $92 billion worth of transactions that include online and in-store purchases as well as sales derived from digital publishers.
Paysafe is looking to gain traction in the esports and online betting verticals. It recently announced the company’s betPARX solution enables players to fund their betting apps in the states of Michigan, New Jersey, and Pennsylvania.
According to a research report from Technavio, the sports betting market in the U.S. is forecast to grow at an annual rate of 10% through 2025 giving Paysafe enough room to expand its top line over time.
Analysts tracking Paysafe expect sales to rise by 3.8% to $1.54 billion in 2022. Comparatively, earnings are forecast to improve to $0.09 per share in 2022 compared to a loss of $0.23 per share in 2021.
While Paysafe’s forward price to sales multiple is attractive at 1.3x, its price-to-earnings ratio is also attractive at 22.7x.
The verdict
PayPal is valued at a higher multiple compared to Paysafe but the fintech giant is also growing at a far higher pace. Paysafe's smaller size provides it with the flexibility to easily enter growth verticals such as online betting and increase market share at a robust pace.
However, PayPal’s liquidity offers the company with the required financial flexibility to reinvest in growth as well as via acquisitions, making it a better stock than Paysafe to own in a volatile macro environment.
PYPL shares were trading at $86.49 per share on Monday morning, up $0.46 (+0.53%). Year-to-date, PYPL has declined -54.14%, versus a -11.44% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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