Digital payments are becoming more prevalent around the world as the demand for cash dissipates and the rise of digital wallets continues. According to PwC, the number of cashless transactions is expected to skyrocket from 1 trillion in 2020 to more than 3 trillion in 2030. This will also likely contribute to the continued rise in peer-to-peer digital payments, which have also exploded in popularity in recent history.
So what companies are going to benefit from the rise in digital payments? While there are many players, two Motley Fool contributors look at the top dogs in the fintech industry and see which is a better buy today: Block (SQ 1.11%) or PayPal Holdings (PYPL 1.13%).
Block: A more diversified approach to fintech
Jamie Louko: Unlike PayPal, which has only one booming business category, Block has thriving consumer-facing services and business-facing services. PayPal is known for Venmo, the leading peer-to-peer payments platform. However, in terms of products for business operations, Block thrives. The company's product ecosystem for merchants generated $661 million in gross profit in Q1, driven by some emerging opportunities.
The first growth avenue for Block's Square payments ecosystem involves moving upstream. Block is trying to gain traction among larger businesses -- which are more lucrative and have lower churn than small and medium-sized businesses -- which it is doing. In Q1 2022, 35% of Square's gross payment volume (GPV) came from sellers generating $500,000 or more in annual GPV. That was up from 30.5% in the year-ago period. In other words, the Square ecosystem is seeing rapid adoption among larger, higher-volume sellers.
The second opportunity for the Square ecosystem is the international market. In Q1 2021, only 8% of Square's gross profit came from outside the U.S. However, after Square entered new regions and brought more products into its existing international markets, international gross profit represented 12% of Square's total gross profit in Q1 2022.
Block also has a dominant peer-to-peer payments platform, Cash App. It generated $624 million in gross profit in Q1, which soared 26% year over year. It also announced new features like an easy deposit for teens -- allowing teenagers to deposit paper money into Cash App at stores like Walmart (WMT 0.46%). This could further increase the customer loyalty of Cash App for this emerging consumer demographic, potentially allowing Block to create lifelong users.
Block's valuation of 7.7 times gross profit is higher than PayPal's six times gross profit, but given how much faster Block is growing, it makes sense that it has a slight premium. In Q1 2022, Block saw a 34% year-over-year gross profit increase, while PayPal saw a 5% decrease over the same period. The bottom line is that Block has continued to see immense success, and it is capitalizing on its potential. With much more room to run than PayPal, Block looks like a better buy for long-term investors.
PayPal: The original and still at the top
Jennifer Saibil: PayPal has been around since 1998, which makes it practically a dinosaur by tech standards. That's given it ample time to refine its model, expand its services, and add millions of customers. Today, it has more than 400 million active accounts, which tops any rival, and it's still adding millions quarterly. To put that into perspective, that's more than the populations of the U.S. and Canada combined.
In Q1 2022, PayPal added 2.4 million net new active accounts, and it's expecting to add 10 million more in 2022. Even though sales growth is slowing after some of its best quarters ever, sales are still expected to increase by double-digit percentages in 2022.
No one stays on top without upgrading, and PayPal has done an excellent job of improving itself through acquisitions and new product development. Its acquisition of Venmo in 2013 removed its biggest peer-to-peer payments competitor at the time and created a dominating force in the industry. It has acquired several other platforms that add value to both its digital payments services and its merchant services. Last year it unveiled an upgraded mobile app meant to be a one-stop financial services shop, offering digital payments, bill pay, savings accounts, and more.
This has all led to a dominant company with nearly $26 billion in trailing-12-month revenue -- and even better -- a highly profitable business. Earnings per share increased 19% to $4.60 in 2021, and while earnings came under pressure in 2022, EPS still came in at a positive $0.88 in the first quarter.
PayPal stock is down 63% this year and trades at only 19 times forward one-year earnings, making it look like an incredible value right now and an excellent long-term pick.
The better digital payment stock?
While Block is certainly the faster-growing company, it might not be suitable for all investors. For those looking for a bellwether that will likely remain strong but might not see the highest growth rates, PayPal looks like a good stock to own.
Conversely, if your portfolio can weather slightly more risk and you take a diversified approach, Block could provide robust returns over the next decade. However, both companies are high-quality businesses, so owning either (or both) would still likely be a smart decision.