PayPal, Affirm, Block bull case estimates raised on changing macro dynamics

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By Sam Boughedda

Following the firm's AlphaWise Consumer Digital Wallet survey, Morgan Stanley analysts raised the firm's bull case estimates for PayPal (NASDAQ:PYPL), Block (NYSE:SQ), and Affirm Holdings (NASDAQ:AFRM).

In the note, they explain that they expect fintech companies to increase specialization.

"While most management teams have not yet indicated major adjustments to their strategies, we nonetheless think that many fintech companies are entering a period of increased specialization. In our view, higher capital costs and profitability pressures, combined with very gradual rates of overall fintech adoption and behavior adjustment (largely driven by generational demographics), will catalyze a return to a strategic framework," the analysts said. "This, we believe, can improve the margin profile for fintechs like PayPal, Affirm and Block sooner than most of the market anticipates."

Furthermore, Morgan Stanley believes "many investors expect PayPal will see its growth prospects dented by share losses," whereas the firm's survey data suggests that they have a "clear competitive advantage in online checkout," and PayPal's investment focus to enhance its digital wallet improves Morgan Stanley's confidence that it can defend its lead.

"At the same time, based on our survey results, we think most of the market underappreciates the meaningful demographic advantage Block's Cash App has with young and lower income users that gives the company a compelling banking opportunity. Meanwhile, survey respondents showed higher demand for additional financial services from BNPLs, who appear to be helping meet unmet credit needs, telling us that the opportunity for Affirm remains significant despite the near-term risk the market is pricing in," the analysts added.

"Driven by changing macro dynamics and our analysis of the margin/revenue benefits from specific partnerships across PayPal, Block, and Affirm, we are raising our bull case estimates and valuations for those stocks. For Affirm and Block's Cash App, the bull case revenue for CY24 increases up to 33%, while margins rise 120-370 bps. For PayPal, we are increasing margins in our bull case by 40 bps," the analysts noted.