PayPal and Square are well known to investors as fast-growing players in the payment processing space. They don’t compete directly in all areas, but they have enough similarities to make a meaningful pairing.
PayPal Holdings Co., Ltd.
Spin-off from eBay Inc.
Square was founded in 2009 by CEOs Jack Dorsey and James McKelvey Jr. (current director) and went public in November 2015. Dorsey is also the CEO of Twitter Inc.
It is a company co-founded in 2006.
PayPal said in 2020: 10-K filing According to the Securities and Exchange Commission, 13% of that year’s revenue came from customers on eBay’s Marketplace platform. He said no other source of income exceeds 10% of the total.
PayPal makes it easy to make payments online via a secure digital wallet. Users simply sign in to their PayPal account to pay the seller from their bank account or credit card. Buyers do not need to provide financial information to merchants.
In 2020, 93% of PayPal’s revenue came from transactions and the rest came from “other value-added services,” a decline in this category over the past two years.
Square offers what is called an “integrated commerce ecosystem” that includes hardware and software to enable sellers to handle point-of-sale and online transactions. Square also has a Cash App to help individual users, businesses and organizations send money and bitcoins.
By app or email.
According to Square, “Customers can also use their savings to buy and sell Bitcoin and equity investments within the Cash App.” Q1 10-Q Report (See page 42 of the report).
The following is a comparison of the quarterly and annual trading volumes of the two companies. The unit is millions.
PayPal has a much larger payment processing business than Square, and its quarterly and yearly trading volumes have increased more rapidly in recent years.
Scale, revenue and profit
The following is a comparison of the company’s market capitalization and GAAP net revenue for the first quarters of 2021 and 2020.
GAAP stands for General Accepted Accounting Principles, and Square’s earnings from Bitcoin holdings boosted the company’s total earnings. Here’s a more detailed breakdown of Square’s revenue:
This shows why investors considering individual stocks have to scrutinize to form their opinion.
This is what Square had to say about the first quarter earnings report. Shareholder letter:
We are deducting Bitcoin revenue because our role is to facilitate customers’ access to Bitcoin. When a customer purchases Bitcoin through the Cash App, he applies only a small margin to the market price of Bitcoin. The market price of Bitcoin is volatile and tends to be out of our control. Therefore, we believe that Bitcoin’s gross profit better reflects not only the performance of these transactions, but also the economic profits.
Details of the letter to Square shareholders:
Bitcoin revenue in the first quarter of 2021 was $ 3.51 billion, an increase of about 11 times year-on-year, but Bitcoin gross profit was only $ 75 million, or about 2% of Bitcoin revenue. was.
Therefore, Square’s adjusted net revenue for the first quarter was $ 1.55 billion, an increase of 44% from the year-ago quarter.
In the 12 months leading up to March 31, Bitcoin excitement caused a surge in Square’s earnings as Cash App users raised the price of cryptocurrencies eight-fold.
The following is a comparison of PayPal and Square’s gross profit (profit before operating expenses) and operating profit (profit before interest and tax) for the first quarters of 2021 and 2020.
While PayPal has a much larger payment processing business, Square is growing faster. Square claims that Bitcoin’s revenue will yield relatively little profit. Regardless, the large amount of revenue from Bitcoin transactions, including customer transactions through the Cash App, indicates the potential for this type of customer activity.
Return of common stock and invested capital
These returns can give insights into how well management is using its capital.
Return on invested capital is income divided by the sum of liabilities and equity. This is an indicator of capital allocation efficiency and is useful when comparing similar companies. In this case, none of these numbers are bad. Both companies continue to grow their businesses in a dynamic environment.
Earnings forecast up to 2025
The following are the results of actual earnings per share in 2020, and the consensus forecast among analysts surveyed by FactSet is up to 2025.
Based on the above, the estimated annual growth rate of EPS and the estimated five-year compound annual growth rate (CAGR) are as follows:
Square’s five-year CAGR will be boosted by the expected EPS breakout in 2021. However, running a four-year EPS CAGR from 2021 to 2025 results in 21% for PayPal and 46% for Square. Both are impressive, but if the analyst’s quote is close to accurate, Square will be at the top. This helps explain Square’s much higher price-earnings ratio, which can be seen further down.
In today’s economy, many investors consider free cash flow (the cash flow that remains after a planned capital investment) to be a very important indicator. One reason is that so many one-off non-cash items can affect EPS. Second, we can develop free cash flow through business expansion, acquisitions, share buybacks, dividends, or other actions that may be good for shareholders.
Square recorded negative free cash flow (FCF) in two of the last four quarters, which is not surprising as the company emphasizes business growth. Therefore, looking ahead may be the most beneficial. FactSet has a consensus estimate of FCF per share up to 2023.
Again, analysts look forward to great things from both companies, especially Square.
Stock Valuation and Performance
Below are the ratio of futures price-earnings ratio to price-earnings ratio and total return figures based on consensus estimates over the next 12 months.
These are high ratings for expected return and sales. Again, this is comparable to the fastest growing technology-oriented stock course in the last few years.
Wall Street Opinion
PayPal’s “buy” rating is high among Wall Street analysts surveyed by FactSet, but the more aggressive pricing target is Square.
Analysts have provided earnings forecasts for years to come, but their stock target is traditionally 12 months. Now you need to think about what the “long term” is for you as an investor. One year can be considered a short period for some long-term investors looking to build up significant profits over a three to five year period.
PayPal vs. Square — Which stock is right for you to own now?
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