Payments made with cash and check account for about $17 trillion worth of transactions made around the world every year. For Square (NYSE:SQ) and Visa (NYSE:V) that adds up to a massive potential growth opportunity as more consumers opt for cashless payments.

Both companies have easily outperformed the broader market over the last three years. Square has been the standout, delivering a monster return of 410%, while Visa stock has doubled in value. 

Let's compare these two companies to see which stock investors should buy today.

A Square register sitting on a counter with a business owner standing behind the counter.

IMAGE SOURCE: SQUARE.

A tech-savvy innovator 

In addition to selling hardware like digital registers and card readers, Square offers a suite of software tools to help sellers manage their businesses. These tools include analytics, invoicing, payroll management, and more. Because Square relies heavily on these services to keep merchants locked in, investors closely watch the growth in subscription- and service-based revenue, which makes up 18% of Square's revenue. Last year, revenue from services more than doubled to $592 million, making it the company's fastest-growing source of revenue. 

Square will face stiff competition as it grows larger and starts to bump elbows with other companies that also offer point-of-sale solutions for sellers. However, it's encouraging to see larger sellers beginning to make up the majority of Square's gross payment volume. In the fourth quarter, 51% of payment volume was generated from sellers with more than $125,000 in annual gross volume. That's a good sign that merchants are sticking with Square as they grow their businesses. 

As Square's core business continues to perform well, management continues to reinvest all the gross profit into the business to release new products and services. The lack of profitability has some analysts concerned about the stock's valuation, but without those investments, Square wouldn't be growing as fast as it is right now. For example, products launched in the last five years made up 51% of adjusted revenue in the fourth quarter of 2018. 

One of Square's key growth initiatives is banking services, where it has an opportunity to monetize the growing usage of the Cash app and the new Square Card for merchants. One analyst expects the Square Card to add more than $100 million to Square's revenue by 2022. 

There's a lot to like about Square, but the stock has gotten very expensive. Square stock has a total market value of about $30 billion, even though the company hasn't generated a consistent profit yet. On the other hand, the company generated $232 million in free cash flow last year -- more than double the year before. 

A wide-moat payments provider

While some investors may think that digital upstarts like Square are displacing the old standbys like Visa in the payments industry, this isn't the case. Digital payment providers like Square and PayPal Holdings are helping the credit card companies expand their moat and convert more cash transactions to electronic ones.

In fiscal 2018 (which ended in September), Visa's payment volume increased 12.3% to $8.2 trillion. On a trailing 12-month basis, total revenue climbed 13% to $21 billion. Those numbers reflect tremendous scale, and the company is using that advantage to invest in driving the adoption of digital technologies, including contactless payments and scan-to-pay with QR codes -- a popular form of payment in Asia. 

Visa is also seeing strong growth in Visa Direct, which allows for secure and fast real-time payments to financial accounts, removing the need for cash, checks, and automated clearing house transactions. The year-over-year growth rate of Visa Direct was more than 100% in Q4 of 2018. 

Additionally, the Visa Token Service has grown threefold over the past year, which reflects the growth Visa is seeing from mobile payments as cardholders choose to store their Visa card information with a digital wallet service.

Which is the better buy?

Between the two, Square seems to be the riskier investment, given that it doesn't generate a consistent profit and it hasn't quite reached the scale it needs to cement its position in the payments industry. Plus, Square offers loans to sellers through Square Capital, which presents an element of credit risk for investors to consider. 

Unlike Square, Visa has no credit risk because it doesn't issue cards or provide loans to consumers. It generates revenue by processing transactions. This is an extremely profitable business, given that Visa consistently generates an operating margin north of 50% every year -- that's a rare thing for a publicly traded company and reflects a very wide competitive moat. 

Square is growing faster, and there doesn't appear to be anything on the horizon to stop the company's momentum. I doubt the stock will deliver the same 400% return over the next five years, but it could still move significantly higher if the company can maintain its current momentum.

As for Visa, analysts expect the company to grow earnings 16% annually over the next five years, and the stock sports a forward earnings multiple of 30. That's somewhat rich, too, but Visa is a safer pick for investors looking for growth without paying a nosebleed valuation.

The bottom line: Buy Square if you can tolerate potentially higher volatility and business risk. But go with Visa if you want to invest in a payments company that offers double-digit return potential but with less risk attached.