There have been plenty of headlines in the digital payments space of late, and one analyst has adjusted his ratings on two of the leading payments stocks.
Vafi also upgraded Paypal Holdings Inc (NASDAQ: PYPL) from Hold to Buy and raised his price target from $110 to $118.
Vafi said Square has done an impressive job in creating some of the best payment products available today, but competition could keep Square’s valuation in check. He said Square is further along than any other payments company is creating what he calls a “virtuous payments circle ecosystem” in which funds get cycled through its ecosystem repeatedly, generating transaction fees along the way.
At the same time, he said the recent consolidation wave in payments has created unprecedented competition, and Square will need to demonstrate more consistent payment volume growth and more momentum in the Cash App to warrant a more premium market valuation.
On the other hand, Vafi said the pullback in PayPal is a buying opportunity given the company’s impressive growth numbers at such a large scale. In addition, he said the recent guidance cut has eliminated most of the near-term risk.
“Net net, with the pullback in the stock post last quarter's results, we see positive risk/reward in PYPL shares currently,” he wrote in the note.
The payments space is well-positioned for secular long-term growth, but increasing competition and lofty valuations are both near-term concerns. Square may ultimately provide the most upside, but PayPal appears to be the safer play at the moment based on Cannacord’s analysis.
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