Fintech giants such as Square (SQ) and PayPal (PYPL) have generated massive wealth for investors. Square was listed on the NYSE in November 2015 and has surged a monstrous 1,300% in just over six years. PayPal went public in July 2015 and has since gained 433%.
The two stocks have easily outpaced the broader markets and command multi-billion-dollar valuations. The COVID-19 pandemic acted as a tailwind for fintech companies as the demand for digitally-powered solutions increased rapidly in the last 20 months.
Alternatively, the growth rates for both Square and PayPal have decelerated in 2021 and the two stocks are now down 35% and 38% respectively from all-time highs. Today I’ll analyze both stocks to try and determine which is currently a better buy for investors in 2022.
The bull case for Square
One of the most innovative companies on Wall Street, Square has gained rapid traction as a fintech provider for businesses. Square offers payment terminals for physical stores that allow them to process digital transactions. It’s also rolling out the Square Invoice service allowing businesses to bill clients in a more efficient way.
Square charges anywhere between 1.6% and 2.2% for each transaction processed on its platform, making it a top bet for investors looking to hedge against inflation. For example, an increase in commodity prices will allow Square to benefit from higher percentage-driven fees. In the last 12-months, the company’s seller-ecosystem allowed Square to derive $153 billion in gross payment volume on its platform.
Square’s Cash App has also gained traction over the last few quarters and now boasts of more than 40 million monthly active users. The CashApp aims to replace legacy banking products and can be used for instant money transfers as well as investing in stocks and cryptocurrencies.
The CashApp has several features that are free-to-use but charges users a 2% commission to trade Bitcoin.
Earlier this year, Square also announced the acquisition of buy now, pay later or BNPL company Afterpay for a mammoth $29 billion which will expand its revenue streams.
The bull case for PayPal
One of the world’s largest payments solutions companies, PayPal is valued at a market cap of $217 billion. It has expanded its ecosystem with the acquisition of Venmo which is a peer-to-peer payment platform. Further, PayPal also offers BNPL solutions as well as the opportunity to buy and sell cryptocurrencies.
PayPal ended Q3 with 415 million active accounts and processed close to five billion transactions in the September quarter. The average number of transactions for each account in Q3 rose by 10% to 44.2, allowing PayPal to increase sales by 13% year over year to $6.2 billion.
PayPal also reported a free cash flow of $1.25 billion and a net income of $1.1 billion in the quarter.
PayPal has partnered with Amazon (AMZN) to allow users to complete payments via the Venmo app. It has also expanded crypto offerings to customers in the U.K. and this vertical should be a key driver of top-line growth going forward, given the widespread adoption of cryptocurrencies in the last year.
Both Square and PayPal are quality growth stocks in the fintech space. I like both stocks at this time and think both are long-term winning investments when looking at their widening ecosystem, improving profit margins, and diversification of the revenue base.
In terms of upside potential, Square is trading at a discount of 69% to analyst price target estimates and PayPal is trading at a discount of 49% to price target estimates.
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SQ shares were trading at $187.44 per share on Tuesday morning, up $7.72 (+4.30%). Year-to-date, SQ has declined -13.88%, versus a 25.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist. More...
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