In this article, I evaluated two financial services stocks, Block, Inc. (SQ) and Donnelley Financial Solutions, Inc. (DFIN), to determine which has the potential for better returns. We believe DFIN is the better investment for reasons explained throughout this piece.

Despite prevailing macroeconomic uncertainty, financial services organizations, ranging from insurance to investment management to banking and capital markets, are well-poised to remain resilient and witness considerable growth in the long term, driven by surging demand for financial services among enterprises.

As per a report by The Business Research Company, the global financial services market is projected to reach $37.48 trillion by 2027, growing at a CAGR of 7.5%.

The adoption of advanced digital technologies is boosting the industry’s prospects. Digital transformation helps financial services companies cut costs, streamline internal and external operations, improve response times, reduce friction between buyers and sellers, and enhance operational efficiency.

Disruptive digital technologies, including artificial intelligence (AI), blockchain, robotics, and machine learning, are gaining immense traction in the financial services sector. For instance, banks increasingly leverage tools such as digital banking, virtual advisors, and AI to offer a more personalized customer experience.

Moreover, financial institutions are using AI in a wide range of settings. Along with the customer service chatbots, organizations are deploying AI for automating loans and insurance underwriting, fraud detection and prevention, predictive analytics, customer relationship management, and credit risk management.

The global generative AI in financial services market is expected to reach $11.22 billion by 2032, registering a CAGR of 28.4% during the forecast period (2023 to 2032).

Furthermore, a high-interest rate environment should significantly benefit financial institutions. Since March 2022, Federal Reserve officials have raised interest rates substantially to cool the economy and fight inflation. While keeping interest rates steady at a range of 5.25-5.5% this week, the highest level in 22 years, the Fed chair signaled more rate hikes ahead.

Given the industry’s bright growth prospects, financial services providers SQ and DFIN are expected to benefit significantly.

DFIN is a clear winner in three-month price performance, with 15.2% returns compared to SQ’s 28.8% decline. DFIN has gained 39.4% over the past six months, while SQ plunged 36.2%. In addition, DFIN’s 36% gain over the past year compared to SQ’s decline of 22.6%.

Here are the reasons why we think DFIN could perform better in the near term:

Latest Developments

On August 8, 2023, SQ’s Square launched Square Go. This consumer booking app offers an end-to-end booking experience, allowing consumers to search, discover, and schedule with highly rated independent service providers in their areas. Also, the Square Go app boosts seller visibility, helping beauty and personal care businesses grow their customer base.

On May 2, DFIN partnered with Salesforce, Inc. (CRM) to deliver best-of-breed environmental, social, and governance (ESG) data management and reporting technology to accelerate customers’ transition to Net Zero and meet requirement SEC requirements. The new ESG data management and reporting solution might boost DFIN’s growth and revenue stream.

Recent Financial Results

For the second quarter that ended June 30, 2023, SQ’s net revenue and gross profit increased 25.7% and 27% year-over-year to $5.53 billion and $1.87 billion, respectively. However, its operating loss came in at $132.11 million. In addition, the company reported a net loss and net loss per share attributable to common stockholders of $125.84 million and $0.20, respectively.

DFIN’s net sales from the Software Solutions segment increased 23.5% year-over-year to $75.70 million for the second quarter that ended June 30, 2023. Its net sales from the Print and Distribution segment rose 1% from the year-ago value to $61.90 million. Also, the company reported net earnings and net earnings per share of $37.70 million and $1.24, respectively.

Past And Expected Financial Performance

SQ’s revenue has grown at a CAGR of 49.6% over the past three years. In addition, the company’s tangible book value and total assets have increased at CAGRs of 36.9% and 58.5% over the same period, respectively.

Analysts expect SQ’s revenue and EPS for the fourth quarter (ending December 2023) to increase 19.9% and 117.1% year-over-year to $5.58 billion and $0.48, respectively. Also, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 12.9% and 40.6% from the previous year to $24.32 billion and $2.44, respectively.

Over the past three years, DFIN’s EBITDA and net income have grown at 15.5% and 50.6% CAGRs, respectively. The company’s EPS has increased at a CAGR of 56.1% over the same time frame, while its levered cash flow has grown at a 9.6% CAGR.

For the fourth quarter (ending December 2023), DFIN’s revenue is expected to grow 4.9% year-over-year to $175.88 million. Furthermore, analysts expect the company’s revenue and EPS for the fiscal year 2024 to increase 3.3% and 6% year-over-year to $828.68 million and $3.29, respectively.

Profitability

SQ’s trailing-12-month revenue is 24.7 times what DFIN generates. However, DFIN is more profitable, with a trailing-12-month gross profit margin of 56.33% compared to SQ’s 34.95%. Also, DFIN’s trailing-12-month EBIT margin and net income margin of 16.26% and 10.49% are higher than SQ’s negative 1.92% and negative 1.36%, respectively.

In addition, DFIN’s trailing-12-month ROE, ROA, and ROTC of 23.31%, 11.54%, and 12.68% are higher than SQ’s negative 1.62%, negative 0.40%, and negative 1.04%, respectively. DFIN’s trailing-12-month levered FCF margin of 13.04% compared to SQ’s 0.04%.

Valuation

In terms of trailing-12-month non-GAAP P/E, DFIN is currently trading at 15.68x, 52.9% lower than SQ, which is trading at 33.27x. DFIN’s forward EV/EBITDA multiple of 8.76 is lower than SQ’s 18.75. Also, DFIN’s trailing-12-month Price/Cash Flow of 12.18x is lower than SQ’s 62.15x.

Thus, DFIN is relatively more affordable.

POWR Ratings

SQ has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, DFIN has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SQ has a grade of D for Sentiment, consistent with its poor financials and unfavorable analyst estimates. On the other hand, DFIN has an A grade for Sentiment, in sync with its solid financial performance in the last reported quarter and optimistic analyst expectations.

In addition, SQ has a grade of C for Value, in sync with its mixed valuation. In terms of forward EV/Sales, the stock is trading at 1.33x, 55.3% lower than the 2.97x industry average. However, its forward EV/EBITDA multiple of 18.75 is 79.1% higher than the industry average of 10.47.

On the contrary, DFIN has a B grade for Value, consistent with its lower-than-industry valuation. The stock’s forward EV/Sales and EV/EBITDA of 2.21x and 8.76x compared to the respective industry averages of 2.97x and 10.47x.

Of the 100 stocks in the Financial Services (Enterprise) industry, SQ is ranked #73, while DFIN is ranked #12.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Stability, and Quality. Click here to view SQ Ratings. Get all DFIN ratings here.

The Winner

Thanks to soaring demand for financial services among corporates and the growing adoption of emerging digital technologies, the financial services industry is well-placed for solid growth and expansion in the long run. Further, a rising interest rate environment should bode well for the industry players as it boosts their profit margins.

Hence, financial services providers SQ and DFIN will likely benefit from the industry’s tailwinds. However, SQ’s relatively weak financials, elevated valuation, low profitability, and bleak growth outlook make its rival, DFIN, the better buy now.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Financial Services (Enterprise) industry here.

43 Year Investment Pro Shares Top Picks

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SQ shares were trading at $46.48 per share on Thursday morning, down $1.09 (-2.29%). Year-to-date, SQ has declined -26.03%, versus a 15.17% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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