PayPal Holdings and Square are counting on Bitcoin to lure consumers to their apps and keep them engaged. Their stocks are now diverging, with Square underperforming since Bitcoin started sliding a month ago.
If the crypto bear market persists, both stocks are likely to suffer, though Square (ticker: SQ) would probably face more pressure, partly because it is more closely associated with Bitcoin among retail investors.
Both payment apps have made buying, selling, and storing crypto a breeze. PayPal (PYPL) offers several cryptos on its app, while Square offers only Bitcoin. The companies act as brokers, earning transaction fees and a profit margin on transactions.
Net revenues from crypto aren’t a big part of their overall business. PayPal should get an incremental 2% bump in revenues from crypto trading this year, amounting to $300 million to $600 million, out of $26 billion in total, according to MoffettNathanson analyst Lisa Ellis.
Square’s accounting is funky: It books Bitcoin revenue on its income statement, amounting to $3.5 billion in the first quarter, out of $5.1 billion in total revenue. Square then deducts its costs of buying Bitcoin and booked only $75 million in gross profit on the transactions, out of $964 million in total gross profit for the quarter.
While crypto profits are minimal now, both payment companies see crypto transactions as a means of acquiring customers and increasing engagement with their apps.
“Their crypto users are in the apps multiple times a day checking prices,” Ellis says, “and that gives the companies opportunities to sell other services.”
Square is more closely associated with crypto, however, party because founder and CEO Jack Dorsey is such a big proponent, recently tweeting that Bitcoin changes everything “for the better,” a dig at fellow tech mogul Elon Musk (who may have soured on the crypto over its environmental toll). Square has also invested $220 million in Bitcoin for its balance sheet over the last couple quarters, and it took an impairment on the investment.
The crypto downturn is clearly affecting Square more harshly; over the last month, Square stock has slid about 17% versus a 4% slide for PayPal.
Crypto isn’t the only reason Square is suffering. It’s getting hit hard by the flight from high-multiple growth stocks as investors price in higher inflation expectations, which reduces the present value of future earnings.
Square trades at 113 times enterprise value to Ebitda (earnings before interest, taxes, depreciation, and amortization), based on next-12-month estimates. PayPal is at 43 times enterprise value to Ebitda, while Visa (V) and Mastercard (MA) are at 27 to 30 times.
“They’re two of my favorite long-term payments companies,” says Ellis, referring to PayPal and Square, “but as a practical matter, institutional investors are going to rebel against these high multiple stocks if they’re concerned about long-term inflation. “
Investors were gung-ho on the stocks as Bitcoin prices soared, but they may now have to add Bitcoin and other cryptos to their bucket list of worries.
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