Surging prices of Bitcoin aren’t just fueling gains for traders. The cryptocurrency could also lift revenue for payment apps like Square and PayPal that are getting a cut of Bitcoin transactions.
Mizuho Securities’ Dan Dolev raised his price target on PayPal Holdings stock (ticker: PYPL) to $290 from $270 on Monday. Bitcoin-related revenue could boost PayPal’s overall sales growth to 20% in 2021, above consensus estimates of 18.7%, he writes.
Nearly a fifth of PayPal customers, or 17%, have traded Bitcoin on its app, Dolev writes, based on a survey of 380 users. Bitcoin traders reported more than three times the usage of PayPal products and services than nontraders—maintaining higher cash balances, using PayPal’s debit card, and paying for goods with PayPal QR codes, he notes.
PayPal makes money off Bitcoin the same way its rival Square (SQ) does. Both companies buy the cryptocurrency from brokers and resell it to customers. Their profit comes from the “spread”—the exchange rate between what they pay for the currency and the price they display to traders. PayPal says it charges an estimated spread of 0.50%, but its total cut of transactions is murky. The company says that “we will not separately calculate or disclose the spread we earn on each transaction.”
PayPal users could also start paying transaction fees next year, according to the company’s disclosures.
Higher prices for Bitcoin may not directly lift revenue for PayPal. But bulk purchases by the payment apps could be lifting demand and supporting prices of the currency. And Dolev views higher prices as a tailwind. “More people want to trade it when prices go up,” he says. “The higher the price of a good, the more wiggle room one has to make a spread.”
Square has been gaining revenue traction with Bitcoin: Its Cash App generated $1.63 billion in Bitcoin-related revenue in the third quarter, up from $148 million a year earlier (though its Bitcoin purchase costs were $1.6 billion). Dolev estimates that Square generates an annualized gross profit $3 of per user. If PayPal can similarly monetize its 80 million to 90 million U.S. customers, it would amount to $250 million, or an additional 1% of revenue growth, in 2021.
Granted, there’s no guarantee that Bitcoin’s surge will keep going. Prices have nearly doubled in the past two months, hitting more than $19,800. Such rapid gains are unsustainable. PayPal and Square are also some of the priciest fintech stocks on the market, after surging in 2020. PayPal, up 102% this year, trades at 48 times estimated 2021 earnings. Square, up 232% this year, trades at 182 times earnings.
PayPal stock was up 1.1%, at $216.42, in recent trading. Square stock was down 1.7%, at $207.39. The S&P 500 was up 1.4%.
Some analysts recommend that investors take money off the table from pricey fintech and put it into bank stocks that look much cheaper (albeit without the growth tailwinds).
BMO analyst James James Fotheringham wrote Monday that he recommends shifting U.S. financial portfolios away from “expensive payment technology stocks like PayPal and Square toward still-discounted credit-sensitive large-cap banks” like Citigroup (C) and specialty lenders Capital One Financial (COF) and Synchrony Financial (SYF). All three stocks trade at around 10 times earnings or less and pay dividends. They could get a lift next year if interest rates rise and the economy gains momentum.
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