Digital payments is a hot industry. Even as e-commerce, which requires digital payments, is decelerating as a portion of total retail sales, consumers continue to use digital means at physical stores through tools like mobile payments.
There are many small fintech companies cropping up to improve digital payments technology and grab a piece of this growing pie. Some of them get acquired by the large companies, like PayPal (PYPL 2.90%) and Visa (V -0.23%). Both of these companies provide various digital payments tools for merchants and shoppers, and they've both beefed up over the past few years to remain top contenders in the industry. Which is the better buy right now?
Moving in the same direction
PayPal and Visa have different core businesses and work together. But their total businesses seem more alike today than ever before.
Visa is the largest payment processing network in the world. It processed more than $14.3 trillion in trailing-12-month volume, and it services more than 4.2 million cards worldwide. It has scooped up several businesses that have helped it improve its technology and reinvent itself as a major fintech player. The most obvious example is that new cards are embedded with chips that work with contactless payments.
PayPal is the original online payment system, previously having been acquired by eBay before being spun off into its own company. It's still the leader in web payments, processing nearly $1.4 trillion in 2022 total payment volume and servicing 433 million active accounts. It also services physical stores with its merchant services and hardware devices.
Profits and margins
Visa's revenue dipped early in the pandemic when shoppers put a hold on non-essential spending. But it's since rebounded and is posting robust growth. Revenue increased 11% year over year in the fiscal second quarter of 2023 (ended March 31). This may not continue to hold up as interest rates are hiked to slow spending enough to curb inflation. But Visa's business typically mirrors the state of the economy, and since the economy grows way more often than not, so does Visa.
It's also a star in profit generation, with profit margins of usually 50% or higher. It's a low-cost business with organic growth opportunities that its top-tier status lends itself to, such as new members and higher spending.
PayPal recorded some of its best quarters ever at the beginning of the pandemic when people switched their shopping online. It's still building on that and has yet to post any quarter of sales declines, and management is guiding for continued increases. Sales increased 9% over last year in the first quarter of fiscal 2023, and management is guiding for around 7% in the second quarter. Profits, however, have been pressured as earlier staggering demand decelerates. Profit margins have decreased to new lows.
PYPL Profit Margin data by YCharts
Something else to keep in mind is that PayPal's active accounts decreased from 435 million at the end of fiscal 2022, a drop of roughly 2 million accounts. Management shrugged this off, explaining that these were low-performing accounts and that it turned its focus to increasing transactions. Transactions per active account increased 13% over last year in the quarter. But investors should keep this in mind as they consider PayPal's growth potential.
Price and valuation
Both PayPal and Visa have beat the market over time, and there's reason for owning both stocks. Although PayPal is the high-tech stock, Visa has soundly outperformed it over the past 10 years.
I think this is an interesting chart, because although Visa's 10-year gain far outpaces PayPal's, you can see that when e-commerce exploded in 2020, PayPal's stock soared along with it, far exceeding Visa's gains. At its current, humble levels, PayPal's stock looks like a bargain; its business is quite improved since 2020, with increasing revenue and profits. But at the current, lower price, PayPal stock trades at only 28 times trailing-12-month earnings -- not too far behind Visa's 31, but low when compared with its five-year average of 55.
In a matchup between the two, I'm going to go with Visa, and this chart is partially why: It's just that much more reliable. So while it isn't likely to increase dramatically like a high-growth stock, it's also highly unlikely to lose value dramatically. It's a steady value stock, with the top position in its industry and every likelihood of maintaining that and outperforming the market far into the future.
