Financial technology, or fintech, is much bigger than the giant payments companies that get most of the attention. It also comprises many smaller innovators like card issuer Marqeta and lending platform Upstart Holdings, as well as traditional financial firms that have embraced new technology, like Goldman Sachs. The industry has exploded as digital advances change how people make purchases and manage their money, and that spells opportunity for investors.
Each of these stocks has merit as a potential investment. But for the top three in the sector, I'm going to stick with three heavyweights, all of which are still growing despite their size: PayPal Holdings (PYPL 0.34%), Square (SQ -2.26%), and Latin American fintech MercadoLibre (MELI -1.01%).
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The leader of the pack
Payments juggernaut PayPal, most noted for its namesake platform and Venmo app, sits comfortably atop the fintech ladder, with more than $21 billion in revenue last year and nearly $1 trillion in total payment volume (TPV). But it's still growing fast, with what it touted as the strongest results in its history in the first quarter of 2021. TPV increased 50% year over year in Q1, and it added more than 14 million net active accounts to reach 392 million, which is more than the U.S. population. Based on that phenomenal performance, PayPal raised its second-quarter guidance to 30% TPV growth and 20% revenue growth.
The company is investing in its infrastructure and options to keep up with the changing pace of digital payments and grow its sales. Most recently, it launched Zettle in the U.S., a point-of-sale solution for small businesses that allows them to take and track digital and in-store payments in one place. That's a direct move to enter Square's territory. It also entered cryptocurrency last year, rolling out buy and sell options on its Venmo payments app.
As large as PayPal is, in some ways it's just starting out. Digital payments are still in their infancy, and the potential is enormous. It sees a $110 trillion addressable market and $50 billion in sales -- more than double its 2020 total -- by 2025.
The up-and-coming challenger
Square has had an exciting story since it rolled out its first credit card reader in 2010 and went public five years later. Growth has been fantastic, with 101% year-over-year revenue growth in 2020 and 266% in the first quarter of 2021.
Square's financial results are not as consistent as PayPal's, and it posted losses in the first two quarters of 2020. That's common with high-growth companies, but those quarters also represented a setback for Square's sellers business, which mostly comprises small businesses that were severely impacted by the pandemic. However, the company rebounded as the economy began reopening, and it has posted a profit for the past three quarters. In Q1 2021, gross profit increased 79% year over year.
Square operates separate two separate ecosystems, its sellers business and the Cash App peer-to-peer payments platform. While all of Square's parts are growing, its big story is Cash App, which competes with PayPal and Venmo. Cash App accounted for most of the company's recent growth, and within Cash App, growth came mostly from cryptocurrency sales, which the company reports as revenue. Without cryptocurrency, Q1 revenue growth came in at 44%. Cash App is also a gross profit machine, soaring 171% versus the seller's program's 32% increase.
I wouldn't worry about Square's seeming dependency on cryptocurrency, since both of its businesses are growing at a fast clip, and the company is demonstrating its ability to enter new areas, a sign of future growth.
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Powering digital payments in Latin America
MercadoLibre's main business is e-commerce. It operates websites similar to eBay and Amazon in 18 countries in Latin America, and those pulled in nearly $1 billion in the first quarter of 2021. While it's based in Argentina, its biggest market is the region's largest country, Brazil, where gross merchandise volume increased 92% and items sold more than doubled in Q1.
But MercadoLibre also has a powerful digital payments business called MercadoPago, and that places it in the fintech box. The company's fintech revenue increased 117% to $465 million in Q1, making up about a third of its total. That's way behind Square's $5.1 billion and PayPal's $6.0 billion, but it also means there's a lot of upward opportunity.
Total payment volume grew 129% (without adjusting for currency effects) in Q1 to almost $15 billion, and total payment transactions increased 116%. Off-platform growth, which measures MercadoPago usage outside of the MercadoLibre platform, increased at a slightly higher rate.South America is lagging in digital payment adoption, but it also has a high growth rate. That's puts MercadoLibre in the perfect position to grow its business as consumers in its market switch from cash to digital payments.
MercadoLibre is the leader in all of its markets and is keeping up triple-digit growth while it pursues enormous opportunities in commerce and digital payments. Investing in that growth means net income has been negative more often than not lately. But the company ended the first quarter with almost $2 billion in cash, which it's using to expand its presence in its various markets as the population embraces new technology, making this a compelling story.
