Better Growth Stock: PayPal vs. Adyen

In 2018, eBay (EBAY -0.14%) announced it would part ways with its former subsidiary PayPal (PYPL 0.64%) and transition all of its digital payments to the smaller Dutch company Adyen (ADYE.Y 0.53%) over the ensuing five years.

That announcement blindsided investors who had assumed eBay would remain PayPal's steadfast ally after it spun off its payments subsidiary as an independent company in 2015. But it also drove a lot of investors to take a closer look at Adyen.

Over the past five years, PayPal's stock has dropped 25% as Adyen's stock rose nearly 150%. Let's review the differences between PayPal and Adyen, why the former underperformed the latter, and if PayPal will remain the weaker overall investment.

Image source: Getty Images.

The differences between PayPal and Adyen

PayPal and Adyen both process digital payments, but they operate with different business models. PayPal's namesake app can be used to make in-store, online, peer-to-peer, and buy now pay later (BNPL) payments. Its Venmo app can be used for peer-to-peer payments, in-store payments, and cryptocurrency trades in the United States. PayPal also owns Braintree, a backend software platform which replaces traditional payment gateways for apps and websites with one-touch payments.

Adyen doesn't provide any consumer-facing apps like PayPal or Venmo. Instead, its backend software works behind the scenes as an end-to-end platform for payments, data, and analytics services. After integrating Adyen into their own online, mobile, and in-store payment platforms, merchants can accept over 250 types of payment methods -- including credit cards, debit cards, mobile wallets, and other payment apps.

Adyen is similar to Braintree, but it reaches beyond apps and websites to serve more brick-and-mortar businesses. Adyen's compatibility with a broad range of payment options also makes it a more flexible option for retailers than PayPal -- which usually tries to lock customers and businesses into its own ecosystem. That's probably why eBay switched over to Adyen.

Which company has been growing faster?

PayPal has a grown at a much slower rate than Adyen over the past five years.

Data source: Company earnings reports.

However, the pandemic actually generated tailwinds for PayPal in 2020 as more people shopped online. Meanwhile, the pandemic generated fierce headwinds for Adyen in 2020 as a lot of brick-and-mortar stores closed down. That divergence reveals that Adyen relies a lot more on in-store payments than PayPal.

But in 2021, PayPal's growth cooled off as the pandemic-era tailwinds dissipated. Adyen's growth accelerated as the pandemic lockdowns ended and more stores reopened. PayPal's slowdown was also exacerbated by its decoupling from eBay, while the influx of eBay's business boosted Adyen's revenues over the past five years.

In 2022, PayPal's growth continued to decelerate as inflation, the Russia-Ukraine war, and other macro headwinds curbed consumer spending. Adyen's growth also cooled off -- albeit to a lesser degree -- as it faced many of the same headwinds.

For 2023, analysts expect PayPal and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise 7% and 13%, respectively. It expects its sales growth to stay sluggish, but it plans to rein in its spending (as seen in its 7% reduction of its workforce earlier this year) and buy back more shares to boost its earnings per share.

Analysts expect Adyen's revenue and adjusted EBITDA to rise 29% and 16%, respectively, in 2023. It also expects to face some near-term macro headwinds, but it won't cut costs like PayPal. Instead, Adyen actually increased its headcount in 2022 and plans to hire even more employees in 2023 as it prioritizes its long-term expansion over its short-term profits.

Which stock is the better value?

PayPal trades at just nine times this year's adjusted EBITDA, but it's easy to see why it's trading at that steep discount. Adyen looks a lot pricer at 48 times this year's adjusted EBITDA, but its robust growth rates, the flexibility of its platform, and its more confident expansion plans arguably justify that higher valuation. So while Adyen is the pricier stock, I'd still buy it before I take a chance on PayPal's wobbly plans for the future.