PayPal Holdings, Inc. (PYPL) and Visa Inc. (V) are two of the world’s largest fintech companies. With people spending more time at home due to the ‘stay-at-home’ trend, both PYPL and V have been witnessing a significant rise in their number of transactions. Moreover, the increased use of e-commerce platforms this holiday season should lead to a significant rise in digital transactions.

Both stocks have generated significant returns over the past five years. While PYPL returned 486.6% over this period, V gained 162.8%. In terms of year-to-date performance, PYPL is a clear winner with 90.4% returns versus V’s 11.6%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

PYPL partnered with Even on November 17th to improve the financial health of its workforce. Last month, the company announced the launch of a new service that would allow its users to buy, hold, and sell cryptocurrency directly from their accounts. PYPL was also granted a first-of-its-kind conditional Bitlicense by the New York State Department of Financial Services (NYDFS).

PYPL has been working with Mastercard Incorporated (MA) for many years now and continued the expansion of its popular PayPal Business Debit Mastercard to more European businesses. In addition to the existing ones, the company made it available in five new European countries Austria, France, Ireland, Italy, and Spain.

V announced a strategic partnership with Conferma Pay on November 23rd to launch Visa Commercial Pay which would help improve cash flow for businesses and eliminate outdated manual processes. V and National Football League (NFL) finalized plans for safer and more secure payments via a cash-free future for the Super Bowl to keep up with the new normal.”

V completed its acquisition of YellowPepper this month which is a fintech pioneer supporting financial institutions and startups in Latin America and the Caribbean. This is a first of its kind acquisition for V in the region which should accelerate the company’s ‘network of networks’ strategy.

Recent Financial Results

PYPL’s revenue increased 24.7% year-over-year to $5.5 billion for the third quarter ended September 2020 primarily driven by constant innovations from the company, in addition to a pandemic-ready business model.

The company’s net revenues from the United States increased by 21.2% year-over-year to $2.8 billion. The number of active accounts increased by 22.4% year-over-year to $361 million. Total payment volume increased 38.1% year-over-year to $246.7 billion. Non-GAAP Net Income increased 41.7% year-over-year to $1.3 billion. Non-GAAP EPS increased 40.8% year-over-year to $1.07.

V’s revenue increased 5.5% sequentially to $5.1 billion for the quarter ended September 2020. While data processing revenues increased 6% year-over-year to $11 billion, other revenues increased 9% year-over-year to $1.4 billion. EPS increased by 4.7% sequentially to $1.12.

Past and Expected Financial Performance

PYPL’s revenue and EPS grew at a CAGR of 18.1% and 27.5%, respectively, over the past 3 years. Also, the company’s EBITDA grew at a CAGR of 19.8% over the same period.

The market expects the company’s revenue to increase by 20.5% in 2020 and 18.7% in 2021. PYPL’s EPS is expected to grow by 22.3% in 2020 and 19.3% in 2021. Moreover, its EPS is expected to grow at a rate of 23% per annum over the next five years.

On the other hand, V’s revenue and EPS grew at a CAGR of 6% and 20.5%, respectively, over the past 3 years. Also, the EBITDA of the company grew at a CAGR of 5.6% over the same period.

The market expects V’s revenue to increase by 6.3% in 2021 and 16.7% in 2022. The company’s EPS is expected to grow by 8.3% in 2021 and 24.4% in 2022. Moreover, V’s EPS is expected to grow at a rate of 12% per annum over the next five years.

Thus, PYPL has an edge over V here.

Profitability

V’s trailing-12-month revenue is 1.08 times what PYPL generates. Moreover, V is more profitable with a gross margin of 96.7% versus PYPL’s 45.9%.

Also, V’s ROE and ROA of 30.7% and 11.5% compare favorably with PYPL’s 18% and 3.5% respectively.

Valuation

In terms of forward P/E, PYPL is currently trading at 54.39x, 40.8% more expensive than V which is currently trading at 38.62x. However, PYPL is less expensive in terms of trailing-12-month P/S (11.91x versus V’s 20.53x), but V’s forward PEG of 2.76x is 10.4% higher than PYPL’s 2.50x.

In terms of trailing-12-month price/cash flow, V’s 42.85x is 4.2% higher than PYPL’s 41.11x.

POWR Ratings

While PYPL is rated “Buy” in our proprietary POWR Ratings system, V is rated “Strong Buy”. Here’s how the four components of overall POWR Rating are graded for both these stocks:

PYPL has a “B” for Trade Grade, an “A” for Buy & Hold Grade, and Industry Rank, and a “C” for Peer Grade. It is currently ranked #12 out of 46 stocks in the Consumer Financial Services industry.

V holds an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #1 in the same industry.

The Winner

Operating for over two decades, both PYPL and V are good investment bets considering their market dominance and huge user base. However, PYPL appears to be a better buy based on its higher earnings growth potential and strategic partnerships.

PYPL shares were trading at $213.90 per share on Wednesday morning, up $7.90 (+3.83%). Year-to-date, PYPL has gained 97.74%, versus a 14.13% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...

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