Block has opportunity to accelerate even with slowing restaurant sales, says Wolfe Research's Peller

But amid slower restaurant sales growth and a drop in foot traffic across the business, are payment stocks like Block and Toast also getting burned? Let's get, let's ask Darren Peller, senior equity analyst at Wolfe Research. What do you say here, Darren? Is the is the drop off, however slight it may or may not be in foot traffic going to affect these stocks, which I think three of the four that we're looking at you have outperform ratings on? Yeah. And thanks for having me. But yeah, listen, I mean, I think there's really three or four main Fintech payment stocks that are highly exposed to restaurants in our coverage. Obviously Toast, which many of you have probably seen in the market is one of the most prolific restaurant technology software and payments companies out there. And then here's a stock that's done well because it's gaining share. But at the end of the day, you are starting to see foot traffic down 3%. Now you're seeing new business formation at restaurants really going to negative year over year territory, even though it's still at a decent rate overall, it's declining year over year now. So companies that are 100% exposed to restaurants like Toast probably do have more risk than not at this point after what's been a good year to date performance. Do you have a favorite among the four? We just showed Toast Square. Let's see. Fiserv and I forget what the other one is for, is another one. Yeah, yeah. Look, I think Block or Square, their business is more diverse. You have a stock that's really trading at a relatively depressed valuation of, in our view, around 14 times free cash. But more than that, they're investing heavily in technology and sales. So we're of the view that it's starting at a low enough point that even a bit of a slow down in restaurants, they have an opportunity to accelerate in the next 6 to 12 months at a bigger way than what's priced in. Tim, jump in here. I know you have a question. Yeah, thank you. I'm curious what you think about PayPal. This is a name I actually have wanted to believe in and it's actually, we're going to talk acronyms in a little while. They they certainly seem to have more competition with the names of you talked about. But obviously they've had some of their own issues. They've changed management. Alex, Chris seems to be doing a pretty solid job there. Any thoughts there? Because this is not an expensive stock. This is a stock with market share. It's a stock that seems to just not have any catalyst to get going. It's a great question. Look at the end of the day, it's a brand, it's well known, it's good free cash, clean balance sheet. Frankly they have as you probably know, I mean 35,000,000 merchants accept PayPal and you have 200 million monthly active consumers using it. So very strong company brand wise. The question however, is and why we're a pure performer rating on it is because there's a lot of competition from even Apple, right? Apple Pay is now showing up not just on the phone, but in browsers. So the bottom line is unless they could prove using that PayPal or Venmo button is going to grow at a good rate again, it's going to be tougher to break out. But they are making some progress under Alex and we do think there's some progress on a little bit of an acceleration there at least. Let me come back to restaurants if I might for just a minute. An awful lot of the quick serve restaurants have come out with discount programs and we just referenced 1 Taco Bell, the latest of them to do so. Six months from now, what is the effect of those of those discount plans going to be? Is it going to be a favorable outcome or less so? It's a great question. I think the overarching theme we've seen is that, and I'll bring this point up, the difference between inflation right now on restaurants versus stay at home food costs is dramatic. It used to be almost the same inflation on both and now we have inflation rates that are literally 4 to 500 basis points higher for in restaurant, you know, spending. So I do think you're going to see more and more consumers shift to these QSR type locations or frankly you just eat at home, which does have an impact on companies that are either in the restaurant, the higher end or the service. The company services those restaurants in the pay a sit at table type restaurants with a little bit more high end and more affluent users. And so keep that in mind. It's a fairpoint, but transaction and foot traffic is down for all those reasons. I think you're going to see it shift.