Tuesday, May 5th, 2020
In the battle of Paypal versus Square, the winning stock is not the one growing the fastest.
When it comes to knowing where to invest your hard-earned money, it turns out that Square (NYSE: SQ) is not the wisest choice as compared to PayPal (NASDAQ: PYPL). Why? For the simple fact that, although Square is growing at an accelerated rate, surpassing PayPal, it is still not as profitable.
As a result, purchasing Square stock will be far more expensive than PayPal stock. PayPal’s current market value is $120 billion. Square’s market value is at $29 billion. PayPal also has more of an appealing “EV(Enterprise Value)-to-Revenue, EV-to-EBITDA, and FCF (Free Cash Flow) Yield metrics.”
The wise choice in investing is to buy into the more affordable, more profitable company.
Gross Payment Volume for PayPal And Square
The two companies make considerable revenue based on transactions since they charge a “take rate” on the gross payment volume (GPV) of transactions. Over the last 12 months, PYPL had earned $676.2 billion in GPV and SQ earned $100.5 billion in GPV.
This means that PayPal processed close to 7 times the GPV than Square, despite PYPL’s stock market value only exceeding Square’s by four times.
According to an article in InvestorPlace, Square stock currently trades at 6.7 times its revenue. However, in three years, with this type of growth revenue, the EV-to-revenue is expected to drop just 3.2 times.
Mark Hake, CFA, and author on Seeking Alpha says:
“I feel that PYPL will be worth between $168 and $212 over the next five years, given its high profitability. This implies an annual ROI for investors of between 9.5% and 15.5%.”
Quint Tatro, president of Joule Financial, also believes that PayPal is clearly the winning stock:
“PayPal is the winner. Fundamentally speaking, the stock is trading 30 times forward earnings, but set to grow those earnings. In addition, the balance sheet is better. And we think that the adoption of the Venmo payment system is really moving beyond just the younger generation.”
Square’s stocks are higher than PayPal’s because of its revenue growth rates, stable take rates, and its GPV.
It is believed that, if Square’s growth begins to slow down, it may increase in profitability. Over a period of time, its productivity level could even improve.
One thing is for sure, Square is a tremendous marketer as well as a product developer. Square’s new Cash App is drawing in and increasing the GPV growth rates. It also seems to be drawing popularity. Investors still believe that the value of its stock is inordinately high and will need to analyze its long-term profitability.
For all the aforementioned reasons, it is a better choice to select a more affordable stock. This is in spite of the fact that its growth rates are more sluggish. Clearly, this means that PayPal stock is the superior choice over Square stock.