By Emily Bary
Shares of once-hot payment-technology stocks, including PayPal Holdings Inc. and Square Inc., have been hammered in recent months, and one analyst thinks the selloff has gone too far.
BTIG analyst Mark Palmer encouraged investors to “strongly consider buying the dip” on both names as they look for stock-picking opportunities amid the “fintech equity carnage.”
PayPal shares /zigman2/quotes/208054269/composite PYPL +2.70% are off 35% over the past three months, while Square shares /zigman2/quotes/205989440/composite SQ +6.39% are down 22%, and both stocks are down on the year. Meanwhile, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +2.02% has gained 2.3% the past three months and rallied more than 23% this year.
Palmer noted that earlier in the pandemic, fintech executives argued that the crisis was driving a permanent shift toward greater digital-payment adoption, but he said that investors now may be wondering whether all that talk of “lasting” changes was “misguided.”
Coming out of the companies’ last earnings reports, “investors seeing suddenly dicey macroeconomic conditions,” including an economic slowdown and rising inflation, “were not inclined to hold the stocks of companies whose volumes and revenues were viewed as vulnerable to a deteriorating operating environment until the next quarterly earnings print,” Palmer wrote in a Wednesday note to clients.
Still, he sees the selloff as overdone as PayPal and Square have lost “almost all the multiple expansion that occurred when the pandemic tailwind was in full force,” despite bright opportunities ahead.
“With speculative froth replaced by reduced expectations that border on despondency in the cases of PYPL and [Lightspeed Commerce Inc.], in particular, we believe it’s worth revisiting the product-market fits that enabled these companies to emerge as market favorites in the first place,” Palmer wrote.
He said Square is “the most compelling” stock within his fintech coverage, as the company’s Cash App has the chance to emerge as a “super app” that bundles various financial services beyond just payments. Palmer is upbeat about the company’s pending deal for buy-now pay-later operator Afterpay Ltd. /zigman2/quotes/207831648/delayed AU:APT -2.18% , as well as its bank charter, which gives Square “the flexibility that others will lack” in building out financial offerings.
Palmer also likes Lightspeed shares /zigman2/quotes/213711078/composite LSPD +6.10% /zigman2/quotes/201279047/delayed CA:LSPD +5.89% , noting that the company took advantage of stock-price appreciation earlier in the year to make acquisitions. Shares took a hit later in 2021, however, after a short seller charged that the company inflated some of its metrics, and after the company’s most recent earnings report showed “tepid sequential customer growth.”
While that earnings report initially “may have appeared to validate the thesis of the activist short seller who had been making noise about the company during the weeks leading up to the print,” Palmer thinks investors may have overlooked a few key positives. For one, while Lightspeed’s net customer additions may have disappointed, that figure reflected “elevated churn and subscription pauses stemming from renewed lockdowns,” whereas gross customer additions were strong.
Another beaten-down stock that looks attractive in Palmer’s view is PAR Technology Corp. /zigman2/quotes/208898026/composite PAR +4.29% , which was off 37% from its all-time high as of the publication of Palmer’s report. The stock’s current valuation “fails to reflect the fact that its end-to-end restaurant technology offering is exceptionally well positioned to generate sustained strong growth by converting a significant portion of the 70% of the enterprise restaurant market that continues to use legacy cash registers and in-store servers over to its cloud-based offering,” he wrote.
Finally, he sees potential in some smaller fintech stocks that have been unloved as of late and that could wind up as acquisition targets. These include Repay Holdings Corp. /zigman2/quotes/206529751/composite RPAY +9.55% , i3 Verticals Inc. /zigman2/quotes/202215352/composite IIIV +3.29% , Paya Holdings Inc. /zigman2/quotes/201362294/composite PAYA +9.20% , and EVO Payments Inc. /zigman2/quotes/204638545/composite EVOP +3.50%