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Both possess nosebleed valuations — PayPal and Square are trading at 7.7 and 13.5 times sales, higher than Amazon.com (NASDAQ:AMZN) — thanks to the love-in investors have for fintech stocks. As InvestorPlace’s Dana Blankenhorn wrote:
“The market’s assumption is that fintech is about to transform the world of money, but not everyone is going to be a winner. PayPal may yet turn out to be one of those winners. It’s betting heavily that it can be… But there are also going to be losers. When you buy PayPal today, you’re taking on enormous risk and expecting big rewards. How much bigger can the payments bubble get before it pops?”
I think Dana would agree that the same statement can be made about Square. Perhaps it’s even more applicable to Jack Dorsey’s other startup.
PayPal Stock Is Cheaper
While both companies are frantically buying other fintech companies in a race to capture more of the payments processing market — PayPal paid $2.2 billion in May to acquire iZettle, a European small-business payment platform while Square paid $365 million in April to buy Weebly, a website hosting and design company.
Square is making a lot of moves to enable small- and mid-sized businesses to operate 24/7 easily and on the fly.
PayPal, the Goliath of the two, is in a weird way playing catchup to Square. It is, for this reason, I think it’s premature to label Square’s stock “ultra expensive” and PayPal stock just “expensive.”
InvestorPlace’s Laura Hoy put it this way in August:
“A big reason SQ stock looks so promising for the future is management’s ability to forecast upcoming trends and tweak its service to offer small- and medium-sized businesses access to solutions that will meet their needs… For example, during its second quarter earnings report, management talked up Square for Restaurants, a new industry-specific point-of-sale subscription that will help restaurants manage their operations more efficiently.”
Square Has an Advantage
Square’s mindset, much like the great Wayne Gretzky, is to go where the puck will be; not where it currently is.
That style of thinking requires both confidence in your ability to successfully predict future trends and a willingness to accept that sometimes you are going to be wrong.
Square’s CEO has co-founded two companies in the last 12 years — he’s also CEO of Twitter (NYSE:TWTR) — making him both a visionary and extremely organized.
Throughout the entire process, Dorsey and his teams have faced lots of trials and tribulations, many of which would stop the average business in its tracks.
PayPal, on the other hand, is the grizzled veteran that’s forgotten how to get down in the trenches and battle it out.
As Hoy suggested, Square is doing a good job meeting the needs of its customers, and that’s leading to considerable growth.
PayPal Stock Is Fading
In April, I recommended that investors buy Square stock over Twitter because Square solves a lot more real-world problems.
“Between Square Capital and its Cash App, Square is providing individuals and businesses with the tools and products to be more financially successful in life,” I wrote April 6. “When you’re feeling better about your finances, you’re more likely to entertain using more of the company’s products and services.”
While PayPal stock is the bigger dog in this fight, I believe Square has much more bite.
In five years time, the valuation gap between the two will be filled as Square’s business grows exponentially faster than PayPal’s.
There’s nothing wrong owning PayPal stock. However, Square is the better long-term buy.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.