PayPal shares fall after margin outlook disappoints

Shares of PayPal sinking today after the company cut its annual operating margin guidance and earnings last night. Deidre Bose has been looking into the numbers and how they stack up in today's tech check Debo. Mel, the earnings weren't great but as some have noted they weren't a complete disaster. The company did raise its revenue and profit outlook for the year but the focus is on margin contraction today. There is another way though of looking at PayPal's fundamentals and that is put them next to rival block where it competes on payments and the Venmo versus Square Cash digital wallets P2P. In terms of free cash flow, gross margins, EBITDA, basically profitability, PayPal looks to be the better play yet it trails block in terms of valuation by a mile. Blocks forward, price to earnings multiple, more than double that of PayPal's.

Something that short seller Hindenburg noted in its recent report on block writing quote, to make up for these fundamental realities, block has extensively relied on non-gap adjustments to report growth despite weakening metrics. The flip side however, I was talking to Dan Dolov, an analyst that covers both companies this morning and I asked him essentially why are investors shunning PayPal. He said quite simply that block is the more innovative company. Jack Dorsey has done a better job of making a viral product alluding to Square Cash's rise in hip hop culture. Something, of course that Hindenburg has questioned but that innovation argument guys that can be seen in the top line growth as well. Block expected to grow revenue faster this year and it's an interesting debate that sets up right because for the first half this year investors were looking at profitability but at least in the fintech space with these two names they're kind of valuing revenue growth higher. For sure and you know do you, it also strikes me that when you have this area where let's be honest these are commodity services.

I mean you're you know you I can send you cash the same way no matter what service you use. So when that's the case if you're PayPal and you're kind of the incumbent and you have little more market share to give up than gain when everyone needs and everybody else's you know market it is maybe that also explains part of the valuation difference because if you look at PayPal's report they say well we still are you know how many three quarters of e-commerce vendors still have the button on there well that's just more market share to lose not gain. Mike I love that you bring up that idea of commoditization because I think this is a question that sort of the entire fintech industry faces you look at in a firm right when they buy now pay later looked really innovative but now everyone's doing it and PayPal is such an interesting example of that. Back in 2021 this is a company that had a market cap of more than three hundred and fifty billion dollars. It was worth more than all but one of the major banks. Today it is worth less than all of them and it kind of tells you that maybe these things have been commoditized. You see the rise of Zell right when P2P also seemed very innovative.

Now you just go into your existing app for any big bank and you're able to do that in seconds. So it raises questions on what the future valuation looks like. Can they ever reach these levels block or square or PayPal excuse me block or PayPal. And it's a good question. I think the fintech industry right now is wrestling with that investors.

Squawk on the Street, CNBC, business news, finance stock, stock market, news channel, news station, breaking news, us news, world news, cable, cable news, finance news, money, money tips, financial news, stock market news, stocks