The Ratings Game: PayPal versus Block: Here’s HSBC’s preferred stock play on a fintech turnaround

It’s been another tough year for shares of PayPal Holdings Inc. and Block Inc., which have respectively lost 22% and 31% so far in 2023, after recording their worst annual performances on record last year.

Bulls are hoping that both names can stage financial comebacks in the near future, as PayPal
PYPL,
-1.07%

enters its next chapter under newly installed Chief Executive Alex Chriss and Block
SQ,
-5.02%

continues to execute on its expense-control strategy. But PayPal’s stock looks like the preferred turnaround play, according to HSBC analyst Saul Martinez, who initiated coverage on a basket of payments names in a recent note to clients.

“Admittedly, the shine has come off the stock,” Martinez wrote of PayPal in his latest report, but the stock’s “discounted valuation offers opportunity.”

He cheered PayPal’s strong consumer and merchant assets, as well as its potential to ease pressure on transaction margins later this year and into next year. Meanwhile, the company could benefit from continued cost discipline and its capital-return strategy.

PayPal’s transaction margins have been a source of anguish for investors, as the company has been seeing faster growth from its lower-margin unbranded checkout business. But Martinez is upbeat that the branded business can “moderately” reaccelerate on the heels of an improvement in e-commerce trends.

Additionally, PayPal could improve the margins of the unbranded business by selling that service to more small and medium-size businesses, rather than larger enterprises that tend to be able to secure more favorable economics for themselves.

Martinez set a buy rating and $69 price target on PayPal shares.

Read: PayPal skeptics may be making a crucial mistake about the stock, Barclays says

As for Block, Martinez said that the company’s ecosystem is “impressive” but that he still sees the name as a “show-me story.”

“While Block is now breaking even on operating profits, the path to more normalized profitability is likely to be long, in our view,” he wrote.

Block shares are off more than 80% from their all-time closing high achieved in August 2021, but he thinks the stock is “taking time to grow into a reasonable multiple.”

Martinez set a hold rating and $46 target price on Block’s stock.

Don’t miss: Block’s stock has more than 50% upside after a ‘massive pullback,’ BofA predicts

See also: PayPal’s stock has ‘catalysts aplenty’ — but this analyst still feels cautious

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