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1 Fintech Stock to Buy Hand Over Fist and 1 to Avoid

Looking for rapid growth? Check out fintech stocks. These companies combine the huge addressable markets of finance with the high growth rates of tech stocks. It’s not uncommon to see fintech stocks double or even triple in value in a single year.

Two of the best-known fintech stocks today are Block (SQ -0.42%) and PayPal (PYPL 0.10%). Both have plenty of upside potential, but one stock in particular can deliver truly huge returns.

Look for this one feature for fintech investing success

Looking for the highest upside fintech stocks? Find companies willing to take risks to stay ahead of the competition.

When it comes to successful fintech investing, it’s the disrupters that make the biggest mark. After all, tons of financial businesses are integrating tech into their offerings. Nearly every U.S. bank today, for instance, has a smartphone app you can use. But the vast majority of these apps aren’t truly disruptive. Most are simply imitations of what a true fintech business introduced years ago.

Just look at what PayPal accomplished in its early days. Founded in 1998, the company was created to bring digital transactions to the masses. Online shopping was still in its infancy in the late nineties, with internet users wary of entering their payment information online. Systematic trust was low, and PayPal stepped in to provide a solution. Through PayPal, anyone could shop securely online, knowing that if a problem occurred, PayPal would be there as a backstop. This innovation was so promising that eBay purchased PayPal in 2002 for $1.5 billion. At the time, more than 70% of eBay auctions were already accepting PayPal as a payment method, with one-quarter of all customers opting to use the service.

In the years to follow, PayPal grew its user base from the tens of thousands to the hundreds of millions. Today, the company boasts more than 400 million active accounts. But this is where the good news ends. PayPal’s active-user base has been shrinking since the fourth quarter of 2022. Competition has grown considerably since the company was spun off from eBay in 2015, and PayPal simply hasn’t been able to replicate its innovation success of the past. Its share price has reflected this reality, adding just 76% in value since 2016. Block shares, meanwhile, have risen by nearly 800% over the same period. As we’ll see, that’s due to Block’s ability to execute on the biggest rule of fintech investing: Choose companies willing to go where few have gone before.

PYPL Total Return Level data by YCharts.

Block has this major advantage over PayPal stock

Take a look at the charts below and you’ll quickly understand why Block is a superior stock versus PayPal right now. Since 2016, PayPal’s annual-revenue growth has averaged around 16%. Block, for comparison, has averaged 46% — more than triple PayPal’s average. Also note that PayPal’s current sales-growth rate is closer to 8%, while Block’s is below average at 25%. But Block’s revenue-growth rates simply appear to be returning to normal levels after a year or two of above-average levels. PayPal’s slow growth, meanwhile, comes after years of simply average results, suggesting that the business is deteriorating.

Block certainly has the benefit of size when it comes to growth rates. It’s easier to grow faster as a smaller business, after all. But today, both companies are approaching a similar size, yet Block is still growing several times faster than PayPal. As we’ll see, this is the result of continued investment in bold innovation.

PYPL Revenue (TTM) data by YCharts.

What Block has done much better than PayPal for years is enter new emerging categories. Bitcoin is a great example. The company changed its name to Block from Square in 2021 to reflect its commitment to blockchain technologies. Through its merchant-payment system and peer-to-peer money service, Cash App, the company was one of the first to bring cryptocurrencies to the masses. Today, more than 20 million Cash App users own Bitcoin through Block. Last quarter, Block customers bought more than $2.5 billion in Bitcoin, up 37% year over year.

To be sure, PayPal has invested in crypto, too. Its Venmo app, for example, allows users to buy and sell Bitcoin. But Block’s commitment to emerging opportunities like this is undeniable. The entire company is named for blockchain technologies. And this month, Block revealed that it would reinvest 10% of its Bitcoin profits back into Bitcoin itself. It remains one of the only publicly traded companies to invest directly in the cryptocurrency.

Right now, Block has a smaller market cap than PayPal — $44 billion versus $67 billion. It also has a lower valuation, trading at 1.9 times sales versus 2.3 times sales. If I’m betting on one of these fintech superstars, I’m going with Block: the smaller, cheaper business with superior growth prospects.

This post appeared first on fool.com

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