Visa (V 0.11%) and Square (SQ 2.43%) are two of the biggest names in the world of digital payments, which is a booming business today. Visa operates one of the world's largest payment networks and is extremely profitable given its pivotal role as an intermediary in the marketplace. Square sits on top of card networks like Visa's, providing the mobile payment platform that processes cards and offering other services to business owners. They're related businesses, but different for the way investors should look at them.
The question today is: Which of these two companies is the better buy? It may be tough to pick one.
Image source: Square.
Growth and profits
You can see below that Visa crushes Square when it comes to scale of operations and profitability. Square is still losing money as it invests in growth, while Visa continues to grow the top and bottom line slowly but surely.
SQ Revenue (TTM) data by YCharts
Visa will likely always have better operating margins than Square given where it sits in the market. Visa has strong pricing power because it's one of only three major credit and debit card processors, while Square is one of the thousands of apps providing payment solutions.
Where Square has the biggest advantage is its growth rate and opportunities to expand beyond payments. Revenue is up 113.6% in the past three years compared to 44.3% for Visa, and Square may only be scratching the surface of its potential.
A new kind of payment platform
Square isn't just about taking payments from customers. It's a platform that businesses are built on top of. It offers customer scheduling, employee management, invoices, analytics, and even small business loans. If you're starting a small business like a food truck or salon, it's the one service provider you need.
As Square grows its platform, it's adding tools for retailers, restaurants, and more types of small businesses. Being able to pull those capabilities off the shelf as needed, rather than piecing together multiple disparate systems, is a valuable tool.
The way Square has built its platform, it may never touch as many customers as Visa, but it'll add more value to the customers it does serve. That in turn should drive more revenue from each customer. And there's a natural lock-in to Square's services because they're core to running operations.
Is Square the value stock here?
Visa is obviously much larger than Square by revenue and market cap, but there's a good case that Square is really the value stock among these two today. The company has a lot more growth opportunities ahead, yet it trades at a much lower price-to-sales multiple, as you can see below.
SQ PS Ratio (TTM) data by YCharts
The argument against Square being a better value is that it doesn't have anywhere near Visa's gross and EBITDA margin profile. You can see that Visa has incredibly high margins, which Square will likely never match given the nature of its business model.
SQ Gross Profit Margin (TTM) data by YCharts
Square may never have Visa's margins, but if it can grow faster than Visa and improve margins along the way, it could be a much better stock for investors long-term.
Check out the latest Square earnings call transcript.
Two great stocks but only one winner
I think both Visa and Square are great companies, and I have outperform calls for both on My CAPS page. But long-term, I think Square has much more upside and will continue to be a disruptive force in business. As it adds capabilities and services that are attractive to larger -- and a more diverse group -- of businesses, the company will continue to expand its market share. It's even possible Square can end up being a key banking partner, having already moved into loans and Square Cash. I think that's just scratching the surface of what the company will offer businesses eventually.
Visa will continue to be a cash machine, and I don't see it losing its market position anytime soon. But Square's upside and ability to disrupt payment infrastructure is too good to pass up.
