The COVID-19 crisis has changed a lot of the ways people shop, transact, and work. With the advent of more remote working and remote shopping, cash usage is falling, while digital payment methods are increasing.
Two of the biggest heavyweights in this space are Square (NYSE:SQ) and PayPal Holdings (NASDAQ:PYPL). Both have developed platforms for consumer transactions, and both are venturing further into the cryptocurrency space.
But which one is the better buy for investors?
PayPal: known for Venmo and eBay
For a long time, PayPal was probably best known as the way people transacted on eBay. The stock used to be wholly owned by eBay before it was spun off in 2015. PayPal allows customers to send and receive funds through its network of payment solutions. These days, PayPal is probably best known for its popular Venmo app, which allows person-to-person digital funds transfers. Braintree is another solution offered by PayPal and gaining in popularity that helps merchants who do most of their business via mobile devices. The payments platform can work with Apple Pay, Samsung Pay, or Alphabet's Google Pay.
PayPal stock is currently trading at 55 times its expected 2021 earnings per share (EPS) of $4.54. Wall Street analysts forecast the company will earn $3.80 per share in 2020, which means PayPal is generating 19.5% EPS growth. On the top line, analysts are looking for $25.4 billion in revenue compared to $21.4 billion in 2020. This works out to be top-line growth of 19% year over year. PayPal made an announcement in October that it is launching a new service that allows its users to buy, sell, and hold cryptocurrencies in its PayPal digital wallet.
Square: more than just the piece of hardware for mobile credit card transactions
Square is probably best known for the square piece of hardware that attaches to phones and other mobile devices and allows users to input credit card information. While that is certainly a part of Square's business, there is much more to the company. The company basically operates two "ecosystems" -- the seller ecosystem and the cash ecosystem.
The seller ecosystem is geared more toward small businesses, and it includes everything from the hardware to software and financial services. Square envisions helping companies manage payroll, accounting, and marketing. The cash ecosystem is geared toward individuals, allowing them to send and receive money as well as invest it. The company receives revenue through per-transaction fees and subscriptions, and it is looking to build a lending business.
Square has a bit of exposure to cryptocurrency mania, as the cash ecosystem allows people to trade bitcoin. Adding this feature has certainly helped the stock. As a growth stock, it commands a growth stock multiple, currently trading around 189 times estimated 2021 earnings per share. This would work out to earnings-per-share growth of 53% compared to expected 2020 earnings per share. Analysts are looking for about $13 billion in revenue for 2021 compared to $9.4 billion in 2020, which is about 38% growth. While the estimates may turn out to be conservative, Square is no longer in hyper-growth mode.
Square and PayPal have outperformed the S&P 500 by a wide margin this year. Both stocks have benefited from the COVID-19 crisis as well as bitcoin mania.
Much of the performance is tied to cryptocurrencies
So which stock is the better buy? Ultimately, when you are dealing with these types of stocks, earnings multiples are relatively meaningless. You could, for example, note that Square's price/earnings (P/E)-to-growth (PEG) ratio is 3.6, which is calculated by dividing its 2021 P/E of 198 by its expected EPS growth of 55%. PayPal's PEG ratio is a bit lower, at 2.8, which is calculated by dividing its 2021 P/E ratio of 55 by its 19.5% growth rate.
The problem is that in growth markets like this, the expensive stocks get more expensive and the less expensive stocks get relatively cheaper. Expensive stocks can stay expensive for a long time. Ultimately, I think Square's move into cryptocurrencies gives it an edge on PayPal. That said, investors should understand these companies will rise and fall somewhat with the overall performance of cryptocurrencies.