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Better Fintech Stock: PayPal or Affirm

By Leo Sun - Nov 24, 2021 at 7:15AM

Key Points

  • PayPal and Affirm have overlapping interests in the fintech market.
  • Investors have been a lot more bullish on Affirm than PayPal.
  • But PayPal’s business is much more stable than Affirm’s -- and its long-term prospects still look bright.

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Should you invest in the industry stalwart or the high-growth disruptor?

PayPal ( PYPL -1.72% ) and Affirm ( AFRM -5.72% ) might initially seem like two very different fintech companies. However, their interests have started overlapping over the past year, and Affirm is emerging as a potential threat to PayPal's long-term growth.

Let's take a fresh look at PayPal and Affirm, review their long-term prospects and valuations, and see which stock is the better buy.

A shopper pays with a smartphone.

Image source: Getty Images.

The differences and similarities

PayPal, which was spun off from eBay in 2015, owns one of the largest digital payment platforms in the world with over 416 million active accounts. It also owns Venmo, a leading peer-to-peer payments app with over 80 million customers.

Affirm, which went public this January, owns one of the world's fastest-growing buy now, pay later (BNPL) platforms. Its service enables shoppers to split large purchases into smaller payments without hidden or late fees, then calculates interest payments with fixed dollar amounts instead of compounding percentages.

Affirm touts that approach as a cheaper and more transparent alternative to credit cards, and it's already locked in 8.7 million active consumers and 102,000 active merchants with its disruptive platform.

PayPal, recognizing the threat BNPL services pose to its card-tethered payments, launched its own "Pay in 4" BNPL service last year. It also recently agreed to buy the Japanese BNPL platform Paidy for $2.7 billion.

PayPal and Affirm are both notably developing all-in-one "super apps" that enable their users to manage all of their finances on a single platform. The expansion of those dueling ecosystems indicates the two companies could become fierce rivals in the near future. 

The bulls love Affirm a lot more than PayPal

Investors have been much more bullish on Affirm. Over the past six months, Affirm's stock price soared more than 130% as it secured major partnerships with Amazon ( AMZN -1.38% ), Walmart, Target, Shopify, and American Airlines.

Those deals could reduce Affirm's dependence on Peloton, the struggling premium exercise bike maker that still accounted for 10% of its revenue last quarter.

During the same period, PayPal's stock declined nearly 25% as it posted two disappointing earnings reports. Its rumored interest in Pinterest also sparked concerns about its ambitious plans to roughly double its annual revenue to over $50 billion by fiscal 2025.

PayPal also secured a new Venmo partnership with Amazon, which could partly offset its loss of eBay's business to its Dutch rival Adyen, but that deal didn't dazzle as many investors as Affirm's BNPL tie-up with Amazon.

Which company is growing faster?

PayPal's revenue rose 21% to $21.45 billion in fiscal 2020, then grew 20% year over year in the first nine months of fiscal 2021.

It expects its revenue to rise about 18% to $25.3 billion for the full year, and for its number of active accounts to grow at least 14% to over 430 million. It also reiterated its long-term goals of hitting $50 billion in revenue with over 750 million active accounts by 2025 during its latest conference call.

Affirm's revenue soared 93% to $509.5 million in fiscal 2020, which ended last June. Its revenue rose another 71% to $870.5 million in fiscal 2021, then increased 55% year over year in the first quarter of fiscal 2022.

Affirm's number of active consumers more than doubled year over year last quarter, and it expects its revenue to rise 41%-44% for the full year.

Which stock is more reasonably valued?

PayPal is consistently profitable, and it trades at 35 times forward earnings and nine times this year's sales. Those valuations are reasonable relative to its growth rates, especially if it achieves its goal of growing its earnings at a compound annual growth rate (CAGR) of 22% from 2020 to 2025.

Affirm isn't profitable yet, and its net losses widened significantly in fiscal 2021 and the first quarter of 2022. Even on an adjusted basis, which excludes its stock-based compensation expenses, its operating margins remain negative. Its stock isn't cheap at 28 times this year's sales, and it hasn't set any aggressive long-term growth targets like PayPal yet. 

The better buy: PayPal

PayPal faces some near-term margin compression as it expands its ecosystem, but it's still a much safer, profitable, and better-diversified fintech play than Affirm. Affirm could continue growing as it gains more merchants and customers, but it's still unclear if its business model is actually sustainable -- especially as PayPal, Square, and other fintech companies launch or acquire similar BNPL platforms.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$183.93 (-1.72%) $-3.22, Inc. Stock Quote, Inc.
$3,389.79 (-1.38%) $-47.57
Affirm Holdings, Inc. Stock Quote
Affirm Holdings, Inc.
$107.24 (-5.72%) $-6.51

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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