Fintech refers to the many ways technology can be used to make financial services faster, safer, and more affordable. Two companies that have been diligently working in the financial technology arena for years are Mastercard (NYSE:MA) and PayPal Holdings (NASDAQ:PYPL), and shareholders have been fantastically rewarded for owning both over the past few years. While I believe both will continue to be market-beating investments over a long enough time horizon -- hence why I hold shares of each in my personal portfolio -- which one would make a better investment today? Let's take a closer look at the data to see if we can arrive at a clear choice.
A wallet for the 21st century
Though it has several lines of business, PayPal's core platform might best be described as a digital wallet -- a tool that makes it easy for account holders to move and store funds, and make online purchases. After it was spun off from eBay in 2015, PayPal took advantage of its lack of affiliation with any financial institution, merchant, phone maker, or operating system to create a number of partnerships. With CEO Dan Schulman at the helm, it has embarked on a strategy of striking as many of these partnerships as possible -- with 38 inked from 2016 through 2018.
PayPal now has such agreements with nine out of the top 10 domestic banks. This past quarter alone, PayPal launched cashback programs with both Discover Financial Services and JPMorgan Chase, allowing cardholders at those institutions to redeem their reward points by making purchases through PayPal's platform. So far, 6 million consumers are eligible to redeem reward points in this manner.
These partnerships continue to drive PayPal's account growth and user engagement. In the third quarter, its active accounts grew 16% to 295 million, while payment transactions per active account rose to 39.8, a 9% increase. This potent combination of metrics continues to drive PayPal's revenue and earnings-per-share growth. In Q3, revenue increased 19% to $4.38 billion and adjusted EPS rose 5% to $0.61, though it should be noted that PayPal did suffer a negative impact from investments. Without that impact, EPS would have risen 31% to $0.76.
Over the past four quarters, PayPal has produced $2.94 in adjusted EPS, giving it a price-to-earnings ratio of 36.7, making its shares relatively expensive compared to the market average.
A growing payments network
Mastercard makes money by collecting a small fee every time consumers use its cards or digital products to make a purchase. While the fees merchants pay to accept cards at the point-of-sale typically average anywhere between 2.5% to 3.5%, most of this revenue is collected by the banks involved in the transactions. For providing the payments network that allows the money to safely and quickly travel from consumers' bank accounts to merchants' accounts, Mastercard collects a small percentage of these fees.
While this might not seem like a lot, it quickly adds up due to the sheer volume of money passing through Mastercard's sprawling network. With almost 2.6 billion cards issued, Mastercard's scale is hard to ignore. In the company's most recently reported quarter, the gross dollar volume of money traveling across its network was almost $1.7 trillion via 22.9 billion transactions.
This immense scale results in an incredibly lucrative business. In Q3, Mastercard's adjusted operating margin landed at 59.4%. With several macro trends acting as catalysts in the war on cash, the company's top- and bottom-line growth continues to be robust as well, with revenue up 16% year over year to $4.5 billion and earnings per share rising 23% to $2.15.
Of course, this growth doesn't come cheap for investors. Over the trailing 12 months, Mastercard has $7.37 in adjusted EPS. With the stock trading in the neighborhood of $295, that gives it a P/E ratio of around 40. While that is quite a high premium relative to the market average, Mastercard's growth prospects and profit margins put it in a league of its own, making it worth its price tag.
Here's my pick
Both PayPal and Mastercard both stand to benefit tremendously from the macro trends driving the digitization of money, such as e-commerce and mobile technology. Both are profitable and growing their top- and bottom-lines at double-digit percentage rates. And both trade at a premium to the average in the U.S. stock market universe. However, if I were forced to choose just one to buy at this moment in time, I would go with PayPal. Its stock price is still down more than 10% from the all-time highs it reached this past summer, a slide that was propelled by what I believe to be short-term concerns. For this reason, I believe PayPal's shares are a slightly better bargain for long-term investors at current prices.