PayPal, Square have structural advantages over big banks: fintech analyst

Dan Dolev, Mizuho senior financial technology analyst, joins Yahoo Finance to discuss the competitive landscape and longterm winners in payments and FinTech.

Video Transcript

MYLES UDLAND: Let's talk a bit more about what's happening over in the payment space, however. Square, really one of the hottest names in that space over the last year or so-- the company out with its latest quarterly results earlier this week. Joining us now to talk more about the company and all things fintech and payments is Dan Dolev. He's a senior financial technology analyst over at Mizuho.

Dan, great to have you join the show this morning. I just want to start with Square's latest quarter, and I guess, from your vantage point as an analyst, how you are thinking about the company. Because I think as someone on the outside, who follows it when earnings come up and when Jack says something, I in my mind have this Bitcoin association with them. How much incoming do you get on that, and where, to you, are the real growth drivers at Square today?

DAN DOLEV: Thanks, and always a pleasure being on the show. Look, Square is all about the terminal value. So the way we think about Square-- and I think that's the way investors should evaluate Square-- is you're looking at the two ecosystems that they have. One, the cash ecosystem, which is the P2P, competes with Venmo kind of the ultimate super app, the ultimate neobank, and then the seller ecosystem, which is that merchant acquiring part, which is where they started.

If you look at what they've been doing in terms of share gains-- and this is coming from Bitcoin, this is coming from pretty much everything you can think about, instant deposits, boosts, et cetera-- they've been gaining share at an accelerated rate over time.

So if you fast forward to, say, 2031, which is that 10-year DCF, we're seeing that cash kept going at a 35% CAGR, given the trajectory that it's on right now. And that's not even assuming all the new products that we think that they're going to come up with. So that's over $30 billion of gross profit by 2031. And the seller ecosystem is going to be over $6.

That's our base case. You discount it back to the present-- that's worth $380. So just that, on our base case, given what they have been done so far gets you $380. If you kind of think a little more bullish, you can get north of $650. And you don't have to go that far there. So I think that's the thing that people should focus on with square. Bitcoin is important, but Bitcoin is not the only thing there. Bitcoin is just an engagement driver that gets people to use the app more and more often.

JULIE HYMAN: And Dan, I'm sure we're going to get more into Bitcoin, but I do want to ask you a little bit more about the fintech landscape. And I know you guys are having a panel on March 3 where you're going to be talking to Cathie Wood about this landscape. How are you thinking about the competitive landscape? Not just about, say, Square and PayPal, but also, this industry is perhaps a bit unusual in how many privately held but fairly sizable competitive players there are. So do Square and PayPal really have that size, first-mover advantage, or are they going to see some of these other guys breathing down their necks?

DAN DOLEV: Yeah, 100%. I think what Square-- I mean, we're also very bullish on PayPal. We have a $375 price target I think you're hitting the nail on the head.

So Square and PayPal have a brand that pretty much nobody else has in the space. Now, I know there's a lot of interlopers. I think Coinbase is going public. There was an S1 that was filed. There's other neobanks out there, like Chime. They're all very fine companies.

But what Square and PayPal have is that they have a brand. They have the P2P edge. And what I mean by that is that because people use that to transfer money to each other-- nobody really has that, that P2P thing-- that lowers the cost of acquisition. So Square's cost of acquisition for a typical customer is like $5. That's insanely low in terms of what banks pay to acquire their customers. And that's because of that viral P2P effect. By the way, PayPal has the exact same thing with Venmo. So those are structural advantages that both Square and PayPal have.

So if I think about the future, I think, yes, of course, there's a lot of room for growth, because they're all taking share away from the banks, from the big banks. But I think Square and PayPal will be at the top of it.

And to your point, yes, we're hosting a very exciting event next week on Wednesday at 3:00 PM with Cathie Wood where we're going to be discussing Square and PayPal-- basically, what's going to happen for the fintech and payments landscape by 2030. So this is looking 10 years out and hearing what Cathie has to say about her topics in this space. So I'm very excited personally about that event.

ADAM SHAPIRO: Dan, on Square and PayPal, can those stocks still trade at, really, the high valuations they are right now when a Coinbase comes to market? And my thinking is, you could see investors rotate out of those two names and put capital work into Coinbase.

DAN DOLEV: Yeah, look, it could go both ways. I think maybe the initial knee-jerk reaction is, there's going to be a lot of excitement about the pure play Bitcoin trading platform.

But what I think is going to end up happening is, if you think about the long term, how things are evolving over the long term-- so it's the same thing with commissions for trading with the whole story. For 10 years, people have been talking about how pricing is going to come down, pricing is going to come down, and it hasn't happened, until it happened and pricing came down.

So I think at the end of days-- and this is not a Coinbase-specific comment. I don't have a view on Coinbase. But I think at the end of days, when you think about the app that actually offers you everything, not just a monolithic thing that just offers you one thing, is way more powerful.

So yeah, maybe there will be an excitement or a knee-jerk reaction of, hey, we're excited. I don't think it's going to come out of Square. It might come out of other names. Over time, I think pricing for trading bitcoins are going to come down, and then the competitive advantage will be the consolidator, the super app, the app that can let you do everything. And that's where both Square and also PayPal have a huge competitive advantage at this point.

MYLES UDLAND: Yeah, it's a really exciting time, Dan, in the payment space. As we're talking, our Slack channel-- just about everything that we're discussing here has kind of been on fire as well. So I think everyone now really waking up to the potential of the space. And again, that chat you have with Cathie Wood coming up next Wednesday, 3 o'clock Eastern.

Dan Dolev of Mizuho, we really appreciate you taking some time to talk with us this morning. I know we'll be in touch, and we look forward to Wednesday's event.

DAN DOLEV: Same here. Thank you so much.