The COVID-19 pandemic has accelerated digitalization and led to a spike in online transactions. Square, Inc. (SQ) and PayPal Holdings, Inc. (PYPL), two leading players in the fintech industry, have been thriving amid the pandemic because of the rapid adoption of digital payments to facilitate the “new normal” way of living.
Both the stocks generated significant returns over the past three years. While SQ returned 432.8% over this period, PYPL gained 171.3%. In terms of year-to-date performance as well, SQ is a clear winner with 216.6% returns versus PYPL’s 87.4%.
But which of these stocks is a better pick now? Let’s find out.
Business Structure and Latest Movements
SQ develops and provides payment and point-of-sale solutions in the United States and internationally. It provides Square Register, a point-of-sale system that takes care of digital receipts, inventory, and sales reports, as well as provides analytics and feedback. SQ is the fastest-growing fintech company in terms of digital wallet usage in the US and its popular Cash App had over 30 million monthly transacting active customers in June.
Apart from the accelerated digital migration, Cash App has also gained from the impact of Fed stimulus, unemployment checks, and tax refunds. The company has recently expanded into banking by getting FDIC approval to offer small business loans and consumer financial products on its Cash App platform. The company strongly believes in cryptocurrency as an instrument of economic empowerment and has put 1% of its total assets, worth nearly $50 million, in bitcoin.
PYPL was spun off from eBay, Inc. (EBAY) in 2015 and has emerged as the most popular digital payment operating platform that enables digital and mobile payments on behalf of consumers and merchants worldwide. It has over 361 million active users globally and is available in more than 200 markets around the world, enabling consumers and merchants to receive money in more than 100 currencies.
In line with the spike in the crypto rates and popularity in recent years, PYPL has launched a new service enabling its customers to trade cryptocurrencies directly from their PayPal account. Moreover, it rolled out a QR code touchless payment system into its point-of-sale systems and e-commerce rewards to boast digital payments amid the pandemic.
Recent Financial Results
In the third quarter ended September 2020, SQ’s revenue surged 140% year-over-year to $3 billion on the back of its Cash App ecosystem. EPS came in at $0.07 compared to the year-ago value of $0.06.
SQ delivered a record gross profit of $794 million, rising 59% year over year. The gross payment volume (GPV) on the Cash App platform was up 332% year-over-year to $2.9 billion. The strong growth in Cash App revenue was offset by the 17% decline in the company’s core higher-margin Seller business to $723 million. SQ’s overall GPV fell 15% year-over-year to $22.8 billion.
PYPL’s revenue for the quarter ended September 2020 grew 25% year-over-year and a significant portion of the revenue increase came from the 38% surge in total payment volume (TPV) to $247 billion. EPS for the quarter came in at $0.86, rising 121% year-over-year. PYPL added more than 15.2 million new accounts during the quarter. Merchant Services volume grew 40%, representing 93% of the TPV.
Here PYPL is in an advantageous position.
Past and Expected Financial Performance
SQ’s revenue grew at a CAGR of 76.6% while EPS declined at a CAGR of 734.6%, over the past twelve months.
The market expects the company’s revenue to increase 373.8% in the current quarter, 300.3% in the current year, and 37.1% next year. SQ’s EPS is expected to grow 8.7% in the current quarter, a decline of 8.8% in the current year, and then rise 54.8% next year. Moreover, its EPS is expected to grow at a rate of 38% per annum over the next five years.
On the other hand, PYPL’s revenue and EPS grew at a CAGR of 19.2% and 24.4%, respectively, over the past twelve months. The CAGR of the company’s free cash flow has been 48.8%.
The market expects PYPL’s revenue to increase by 22.7% in the current quarter, 20.6% in the current year, and 18.8% next year. The company’s EPS is expected to grow 15.1% in the current quarter, 22.3% in the current year, and 19.5% next year. Moreover, PYPL’s EPS is expected to grow at a rate of 23% per annum over the next five years.
PYPL has an edge over SQ here as well.
PYPL’s trailing-12-month revenue is more than 2.65 times of what SQ generates. PYPL is the most profitable as well with a gross profit margin of 45.9% versus SQ’s 32.2%. Moreover, PYPL’s ROA of 3.47% compares favorably with SQ’s negative value.
In terms of forward P/E, SQ is currently trading at 259.62x, 384% more expensive than PYPL which is currently trading at 53.62x. Though SQ is less expensive in terms of trailing-12-month P/S (11.32x versus 11.72x), its forward PEG of 6.42x is 161% higher than PYPL’s 2.46x.
In terms of trailing-12-month price/cash flow as well, SQ’s 277.40x is 585.6% higher than PYPL’s 40.46x.
Both SQ and PYPL are rated “Buy” in our proprietary POWR Ratings system. Here are how the four components of overall POWR Rating are graded for SQ and PYPL:
SQ has a “B” for Trade Grade and Peer Grade, and a “C” for Buy & Hold Grade and Industry Rank. In the 232-stock Financial Services (Enterprise) industry, it is ranked #5.
PYPL has an “A” for Trade Grade and Peer Grade, a “B” for Buy & Hold Grade, and a “C” for Industry Rank. It is ranked #2 in the 46-stock Consumer Financial Services group.
While both SQ and PYPL are good long-term investments considering their market dominance and strong prospects in the digital payment world, PYPL appears to be a better buy based on the factors discussed here.
The rapid penetration of digital payments led to massive growth for both SQ and PYPL this year. While SQ looks a viable option to bet on the immense growth potential, PYPL is relatively cheaper given its size, customer base, analyst sentiments, and strong financials.
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SQ shares were trading at $175.30 per share on Tuesday morning, down $8.78 (-4.77%). Year-to-date, SQ has gained 180.21%, versus a 11.38% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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