Global digital payments will exceed $7.6 trillion by 2024, according to Mordor Intelligence, up from $3.4 trillion in 2018. PayPal (PYPL -1.14%) and Square (SQ -1.68%) are two outstanding businesses that are well positioned to profit from this megatrend in the years ahead.
But which of the stocks is the better option for you? Read on to see how to choose between these two payments titans.
Image source: Getty Images.
Competitive strategy
PayPal has positioned itself as a facilitator of online purchases. It helps to make the online order checkout process easier, faster, and safer by eliminating the need to enter financial information each time a purchase is made. PayPal is also a leader in peer-to-peer payments with its popular Venmo app, which allows users to transfer funds quickly and securely. In turn, PayPal has become a powerful force in digital payments.
Square is also a leader in peer-to-peer payments. In fact, as fellow Fool.com contributor Daniel Sparks notes, Square's Cash App is currently enjoying more downloads than PayPal's Venmo, according to research firm Nomura Instinet.
Moreover, Square helps to level the playing field for small businesses. It offers much of the technology these companies need to both start and scale their operations. Its core credit card processing hardware makes accepting digital payments easier, and an ever-growing array of services -- such as e-commerce, payroll, inventory, and financing solutions -- further help Square's customers more efficiently manage their businesses. In this way, Square's stock is a play on the growth of entrepreneurship around the world, in addition to the growth of digital payments.
All told, both PayPal and Square possess strong competitive advantages in their core markets. But I'm going to give the edge to Square, which arguably has greater optionality in its business model, and therefore gives investors more ways to win in the years ahead.
Advantage: Square
Financial strength
Let's now compare some key financial metrics for these two payments leaders.
|
Metric |
PayPal |
Square |
|---|---|---|
|
Revenue |
$15.5 billion |
$3.0 billion |
|
Operating income |
$2.2 billion |
($47 million) |
|
Net income |
$2.1 billion |
($26 million) |
|
Operating cash flow |
$5.5 billion |
$116 million |
|
Free cash flow |
$4.7 billion |
$71 million |
|
Cash and investments |
$10.1 billion |
$1.7 billion |
|
Debt |
$2.0 billion |
$1.0 billion |
Data sources: Morningstar, company filings. All income and cash flow figures cover past 12 months.
Square has yet to generate consistent GAAP profits. Instead, the company is investing heavily in growth projects as it seeks to capture a larger share of the multi-trillion global payments market. Square's operating and free cash flow are also just a small fraction of PayPal's. Moreover, the $8 billion in net cash on PayPal's balance sheet is over 11 times greater than Square's $700 million in net cash. For these reasons, PayPal has a significant advantage in terms of financial strength.
Advantage: PayPal
Growth
PayPal may be more financially powerful today, but Square is projected to grow at a far faster clip in the coming years. Wall Street expects Square's revenue to surge 60% in 2018 and 43% in 2019, as it broadens its product lineup and expands internationally. Additionally, analysts estimate that Square's earnings per share will rise more than 50% annually over the next half-decade, as its margins continue to improve as it scales its operations.
PayPal, meanwhile, is projected to increase its revenue by about 17% annually over the next two years, as it further expands its customer account base. And over the next five years, PayPal's profits are projected to grow by 22% annually -- impressive growth for a $110 billion company, but still far less than that of Square.
Advantage: Square
Check out the latest Square earnings call transcript.
Valuation
Lastly, let's take a look at some stock valuation metrics, including price-to-sales, price-to-earnings, and price-to-earnings-to-growth ratios.
|
Metric |
Square |
PayPal |
|---|---|---|
|
P/S |
10.80 |
7.29 |
|
Forward P/E |
111.03 |
27.50 |
|
PEG |
3.10 |
1.48 |
Data source: Yahoo! Finance.
Based on both sales and earnings, PayPal's stock is much cheaper than that of Square. This is to be somewhat expected, considering Square's sharply higher projected earnings growth rate. But even if we account for this -- as we do with the PEG ratio -- PayPal's stock is still the better deal.
Advantage: PayPal
Check out the latest PayPal earnings call transcript.
The better buy: You decide
Ultimately, you'll need to determine which of these factors is most important to you. Value-focused investors will likely find PayPal's superior financial strength and lower-priced shares more appealing. Growth investors, however, may be more attracted to Square's optionality and rapidly rising revenue streams. Regardless of which stock you choose, you'll be investing in an excellent business that's poised to deliver strong gains in the coming years. Or, your best move may simply be to buy shares in both of these payment leaders today.
