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PayPal (PYPL) vs. Square (SQ): Which Fintech Stock is a Better Buy?

Benjamin Rains

Stocks got off to a rocky start in October on the back of some worrisome U.S. manufacturing data and a deeper European slowdown. Still, the S&P 500 posted its strongest first nine months of the year in over two decades. Meanwhile, low interest rates could see Wall Street and investors continue to search for returns.

PayPal’s Pitch

PayPal is a digital and mobile payment pioneer that officially spun off from eBay EBAY in 2015. Last quarter, the firm’s total transactions jumped 28% to 3 billion, while person-to-person volume surged 40% to account for roughly 30% of total payment volume. Investors should pay close attention to the rise of P2P offerings, which has seen PayPal’s Venmo grow in a space that incudes giants like JP Morgan JPM and Square’s Cash App.

PYPL has also invested hundreds of millions of dollars in Uber UBER and expanded its partnership with the ride-hailing power. The San Jose, California-based firm also offers credit and debit cards. But its core digital-based payment system (for merchants and shoppers) is still its largest business.

In total, PayPal added nine million new active accounts in Q2 2019 to lift its global total by 17% from the year-ago period to 286 million, which helped its total payment volume pop 24% to $172 billion.

Square’s Story

Square might not have been as early to the financial tech space as its peer. Nonetheless, the firm helped change the way many small businesses process payments back in 2009 with the launch of its first credit card processor. Today, SQ has expanded its offering in a more cashless society into everything from business loans to debit cards and cryptocurrency.

The San Francisco-based firm’s back-end infrastructure and wider array of product offerings have helped it become more attractive to larger businesses. For example, lager sellers accounted for 54% of total gross payment volume in Q2, up from 50% in Q2 ‘18 and 46% in the Q2 ‘17. Meanwhile, Square’s total GPV climb 25% to $26.8 billion.

The company’s P2P offering, the Cash App, saw its revenue skyrocketed from approximately $1 million in the second quarter of 2016 to $135 million last quarter—excluding bitcoin. SQ also boasted that 3.5 million customers used its Cash App-based debit card. Square Capital also facilitated roughly 78,000 loans, up 36%. And SQ announced that it will sell its food-delivery platform Caviar to DoorDash for $410 million as it tries to become more profitable.

 

 

 

 

Outlook & Earnings Trends

Looking ahead, our current Zacks Consensus Estimates call for PayPal’s adjusted Q3 earnings to surge 20.7% on 17.9% higher sales that would see it hit $4.34 billion. This would mark the firm’s strongest top-line expansion since sales jumped 23% in Q2 ‘18 and blow away last quarter’s 11.6% growth.

The company’s full-year fiscal 2019 earnings are projected to soar 30% on the back of 14.7% stronger sales. PYPL’s bottom-line is then projected to jump 11.3% higher in 2020 on 17.7% higher revenue. The company’s Q3 earnings estimates have remained unchanged over the last 90 days, while fiscal 2019 climbed on the back of a solid Q2 performance. PayPal has also topped our quarterly earnings estimates by an average of 10.4% in the trailing four periods.

Square’s third-quarter revenue is projected to surge 35.4%, with Q4 set to jump 32%. Both of these would represent a significant slowdown compared to Q2’s 44%. In fact, SQ’s sales had climbed by more than 43% for six straight quarters. However, prior to that impressive stretch, the fintech firm’s sales climb in a range between 21% and 36% for six quarters.

With that said, the firm’s adjusted fiscal 2019 EPS figure is projected to climb roughly 64% on 37.9% higher sales. Peeking further ahead, SQ’s 2020 sales are expected to surge 28% above our current-year estimate to help lift its bottom line by an additional 41%. Square’s earnings revision activity has been mixed recently but it has blown by our earnings estimates in the last four quarters.

 

 

 

 

Bottom Line

The digital payment landscape is expanding quickly around the world, from India to China. Tech powers including Google GOOGL, Apple AAPL, and Facebook FB are looking to expand their reach in the space that years ago some might have assumed banking and credit card giants like Visa V or Mastercard MA might have controlled.

Speaking of China, PayPal just became the first foreign company licensed to provide digital payment services in the world’s second-largest economy. Reports broke Monday that PayPal acquired a 70% stake in GoPay. Meanwhile, Jack Dorsey’s firm continues to face profitability concerns that have helped SQ stock plummet 37% in the last 12 months, against PYPL’s 18% climb.

Year-to-date, PayPal stock is up 22%, against SQ’s 10% climb. PayPal stock closed Tuesday down 16% off its 52-week highs at $102.53 per share, while Square shares hover 39% off its October 2018 highs. Both Square and PayPal are currently Zacks Rank #3 (Hold) stocks, with high Growth grades.

Only growth-minded investors should really consider either stock at the moment since both have high valuations and don’t pay a dividend. In the end, Pay Pal and Square stock seem like solid growth-focused choices within the broader fintech space. Clearly, SQ has more room to run, but it is likely wise to see more of a resurgence before jumping on this once high-flying stock.

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