Credit card transaction volume will surge 54% by 2020, according to The Nilson Report. And by 2025, worldwide card payment volume is projected to reach a staggering $55 trillion annually.
Square (SQ +0.39%) and Visa (V +0.65%) are two businesses that are particularly well positioned to profit from these massive global trends. But which is the better buy today?
Image source: Getty Images.
Financial fortitude
Let's look at some key metrics to see how Square and Visa stack up in regards to financial strength:
|
Metric |
Square |
Visa |
|---|---|---|
|
Revenue |
$2.050 billion |
$18.358 billion |
|
Operating income |
($55 million) |
$12.144 billion |
|
Net income |
($62 million) |
$6.699 billion |
|
Operating cash flow |
$130 million |
$9.208 billion |
|
Free cash flow |
$105 million |
$8.501 billion |
|
Cash and investments |
$868 million |
$13.438 billion |
|
Debt |
$354 million |
$18.367 billion |
DATA SOURCES: MORNINGSTAR, COMPANY FILINGS.
Visa is a financial powerhouse, with nearly $7 billion in annual profits and $8.5 billion in free cash flow production. Square, on the other hand, is not yet profitable on a GAAP basis. This is to be expected, as Visa is the more established business, with Square just recently entering the public markets in November 2015. Still, Visa clearly has the edge in terms of current financial strength.
Advantage: Visa.
Growth
Visa may be the more financially sound business, but Square is growing far more quickly than its larger rival:
SQ Revenue (TTM) data by YCharts.
Wall Street expects this trend to continue. Square is projected to grow its revenue by 32% in 2018, while Visa's sales growth is anticipated to come in at about 10%. Moreover, analysts' forecasts have Square increasing its earnings per share by 73% over the next year; Visa is expected to grow its EPS by 16% during this same time.
With its current and expected future growth significantly exceeding that of Visa, Square has the edge here.
Advantage: Square.
Valuation
No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for Visa and Square, including price-to-sales and price-to-earnings ratios.
|
Metric |
Square |
Visa |
|---|---|---|
|
Price-to-sales |
8.66 |
15.48 |
|
Trailing price-to-earnings |
N/A |
44.79 |
|
Forward price-to-earnings |
101.51 |
25.75 |
DATA SOURCE: YAHOO! FINANCE.
Square's stock is less expensive in terms of price-to-sales, while Visa's shares are cheaper on a forward P/E basis. That's to be expected, as Visa is the far more profitable business, with $6.7 billion in net income over the past year, compared to a $62 million loss for Square. Ultimately, profits are what we're seeking as investors, so I'll give the edge to Visa in this valuation category.
Advantage: Visa.
The better buy is...
Visa and Square are both excellent ways to profit from the boom in credit card payments. But with its superior financial strength and more attractively priced stock, Visa is the better buy today.
