Technology has changed every facet of daily living, and the financial industry has seen some of the biggest transformations as a result of technological advances. PayPal Holdings (NASDAQ:PYPL) originally started out as a simple way to help online marketplace customers pay for the purchases they made, but it has since evolved into a massive player in facilitating electronic payments and mobile transactions. Meanwhile, established players like American Express (NYSE:AXP) have had to scurry to find ways to preserve their competitive advantages after decades of dominance.
For those looking to invest money today, the obvious question is, which of these stocks is a smarter pick right now? With that in mind, below you'll find some discussion on how PayPal and AmEx compare on some key attributes that smart investors look for in their favorite stocks.
Valuation and stock performance
Both PayPal and AmEx have delivered strong performance recently, but the newer company has a huge lead. PayPal has risen 58% since June 2017, while American Express is up 26% over the same period.
When you compare the two companies using earnings-based valuation metrics, it's not particularly surprising to see PayPal come out with a pricier-looking stock. Thanks to some one-time items related to recent events like tax reform and accounting rule changes, neither PayPal's trailing earnings multiple of 57 nor AmEx's corresponding multiple of 34 is particularly trustworthy. However, when you incorporate near-term future earnings expectations, the valuation disparity becomes clearer. American Express sports a forward earnings multiple of just 13, compared to almost 30 for PayPal. For those who rely on these types of valuation metrics, AmEx looks like a much more favorably priced stock.
When it comes to dividends, there's no comparison between these two stocks. PayPal Holdings has never paid a dividend, as it's still at a point in its history during which it needs to use as much money as it has available to take full advantage of the opportunities it has to grow. By contrast, American Express is much more mature of a company, and so it has the ability to foster its growth while also still paying about a 1.5% dividend yield based on current prices.
That yield might not seem like a lot, but American Express has grown its payout consistently ever since the financial crisis. With its per-share quarterly distribution having nearly doubled since 2012, AmEx has its investors hoping that the financial giant will announce another move to boost its payout within the next month. The company made its most recent dividend increase in late June last year, so if AmEx keeps its timing consistent, then optimistic investors are right to hope for another 8% to 9% boost that could send the per-share dividend up to $0.38 per share in the near future.
Growth prospects and risk
Where PayPal stands out is in the extent to which it has grown and is looking to expand even further. Having helped to pioneer online electronic payments, PayPal is offering a much wider array of different services, going beyond e-commerce to allow for simple person-to-person payments. The company's availability on any type of desktop computer or mobile device regardless of type is a competitive advantage that stands in stark contrast to some of the platform-specific products competitors have rolled out. At the same time, PayPal is demonstrating its value proposition to a larger base of merchant customers as well, and that should continue to develop a virtuous cycle of expansion due to favorable network effects. With timely acquisitions of companies like European-based payment processor iZettle and retail artificial-intelligence data analytics platform Jetlore, PayPal wants to be a global giant in this budding industry niche.
American Express has had to work a lot harder to adapt itself to changing times. Having established itself as a giant in the traditional charge card industry, AmEx risked making itself irrelevant to a new generation of tech-savvy shoppers who didn't necessarily value the membership proposition its brand promises. Yet American Express has doubled down on providing a wider range of ancillary services and perks with its cards, ranging from free baggage fees on airlines and airport lounge access to annual credits for Uber car-sharing services. Thanks largely to a strong economy, cardholders are using their cards more often, and that's contributed to a substantial rise in earnings over the past year. AmEx's business is too big to sport the same expected percentage increases PayPal is likely to produce, but that size also gives it some protection against disruptions to which PayPal would be more vulnerable.
Making a pick
PayPal's growth prospects are impressive, and many believe the company has a lot further to grow in order to take advantage of all of its opportunities. Yet with a market cap that already exceeds that of American Express, PayPal's price tag already bakes in a lot of future growth. Value investors will prefer the more modest valuation that American Express offers, even as the financial giant aims at evolving to be attractive to younger generations of potential cardholders.