PayPal, Block, Affirm bull case raised at Morgan Stanley on better profit potential
Pekic

Morgan Stanley analyst James Faucette raised his bull case for fintechs PayPal Holdings (NASDAQ:PYPL), Affirm Holdings (NASDAQ:AFRM) and Block (NYSE:SQ) on the basis that increased partnerships and lower investment in venture capital could improve revenue and margin profiles over time.
As fintechs boost their focus on the products and services where they have a relative competitive advantage, "we expect it will not only reduce the need for dilutive hedge-driven investment to protect lanes but help facilitate more mutually beneficial cooperation," the analyst wrote in a note to clients earlier this week, citing results from the firm's survey. 
Seeking Alpha contributor Khaveen Investments viewed PayPal (PYPL) as a Strong Buy given Venmo's revenue opportunity from its partnership with Amazon (AMZN).
In addition, fintechs have started to cut back on their venture capital-related investments, Faucette noted, as a higher interest rate environment increases their cost of capital. He pointed out that VC investment in fintech has dropped 64% year-over-year in Q3 to 2019 levels, before the pandemic. 
"And return requirements are higher amid rising rates, which we think will reduce competitive intensity in the space and force companies to specialize in their highest-return capabilities, allowing for faster margin expansion and better stock performance," the note read. 
For Buy Now, Pay Later platform Affirm (AFRM) and payments firm Block's (SQ) Cash App, Faucette increased his bull case revenue for 2024 to 33%, while margins rose 120-370 basis points. He also increased PayPal's (PYPL) margins in his bull case by 40 bps. 
In a broader risk-off session, AFRM, -1.1%, PYPL, -0.8%, and SQ, -1.1%, all slipped in early trading. 
Fellow SA contributor JR Research questioned whether Block can regain profitability and gain operating leverage through 2023 amid the Federal Reserve's hawkish stance.