Square Inc (NYSE:SQ) has grown its breadth and its depth, but Square stock is super expensive and that’s going to hamper it.
Consider the number, $7.6 trillion. That’s a lot of money. It also happens to be the estimated size of the global digital payments market by the time the calendar rolls over to 2024. And there’s plenty of reasons why that estimate may be close to reality.
Over the last decade or so, the digital payment industry has seen tremendous growth- with new providers, apps, platforms and tools being launched every year. And two of the biggest players happen to be PayPal Holdings Inc (NASDAQ:PYPL) and Square.
Both Square and PayPal continue to disrupt the payments market and as such, their respective stocks have surged over the last few quarters. SQ stock has returned a staggering 500% over the last five years, while PayPal returned a more moderate 240% in the same time.
With the two payment stocks continuing to add customers and products, growth at both firms is almost assured as we shift towards a cashless society. The question for investors is, which horse should you hitch your wagon up to? Is Square stock or PayPal a better buy today?
Square and PayPal – Similar, But Different
At first blush, Square and PayPal are looking very similar these days. Both are quickly becoming digital payment kings and offer many of the same-styled products/services. However, their core markets are sort of different. PayPal originally cut its teeth as a facilitator online purchases.
In this, PayPal operates its own payment network similar to Visa (NYSE:V) or Mastercard (NYSE:MA) in order to make the checkout process faster, easier and more secure. It’s taken that show on the road with its peer-to-peer payment app Venmo as well as rolling out new mobile ecommerce applications.
On the flipside, SQ has focused its attention to small- and medium-sized businesses. The problem for many Mom & Pop shops is that it’s very cost prohibitive to accept credit cards. Via its mobile readers and point of sale systems Square has made it easy for smaller merchants to accept cards or a mobile wallet.
Since then, SQ has moved into making business loans, services such as payroll and inventory management as well as even peer-to-peer payments via its Cash App. Square is even taken on food delivery services like GrubHub (NASDAQ:GRUB) with its Caviar restaurant ordering/payment service.
So, PayPal is going after enterprise, while SQ is focusing on smaller consumers/businesses. It’s here that Square could have the advantage. These days, particularly every website already has the option to pay via PayPal. The growth of new customers can be hard to come by. PayPal wins by the number of transactions on its network increasing.
However, for Square, there are still plenty of fish in the sea to sign-up and from whom collect royalty fees. Meanwhile, SQ may be taking some of the fire away from PYPL as well. Cash App downloads have recently started to outpace Venmo’s.
Digging Into SQ & PYPL’s Fundamentals
Given the surge in digital payments and adoption, Square and PayPal are each growing nicely. Their main bread and butter are collecting royalties from their respective networks and services. According to analysts, Square is set to see its sales jump by a whopping 43% this year and more than 34% next year. Likewise, PayPal is set to see its revenues rise by roughly 17% and 18%, respectively.
Those are both some impressive sales gains. Better still is that those gains will turn into some serious profits. PYPL is set to see its EPS grow by 23% this year, while SQ should see its earnings grow by 60%. That jump should be able to help Square actually make money this year.
The downside is that investors are already paying a hefty premium for that shift to profits and that EPS growth. According to Zacks, Square stock can be had for a forward P/E of around 98. That’s a hefty penny even for Square’s growth potential.
On the other side, PYPL stock can be had for a forward P/E of around 39. Not cheap, but not unreasonable for a tech stock with double-digit revenue/profit growth. In this instance, PayPal is a much better bargain than SQ stock.
PayPal wins on another front as well. As of last quarter, PYPL had a monster $9.5 billion on its balance sheet. Meanwhile, debt was roughly $2 billion. This net cash position provides PayPal with plenty of firepower to invest in new tech, make some buyouts and even *gasp* pay a dividend.
SQ, on the other hand, has only about a billion in cash and a billion in debt. That can limit its flexibility and ability to fund future growth.
Finally, with its large size, PYPL is just minting free cash flows (FCF) -clocking in at about $6 billion. That compares to SQ stocks $200 million. Again, not bad. But considering investors are paying out the noise for Square, PYPL stock looks like the better bargain when it comes to fundamentals.
Should You Buy PayPal Or Square Stock?
With both Square and PayPal seeing some torrid growth, which makes more sense for your portfolio? Personally, I’m more inclined to give the nod to PYPL over Square stock.
It’s not that Square is a bad buy by any means, it’s just that firm will need to put up big numbers in order to justify its lofty forward P/E. Given its “rockstar” CEO Jack Dorsey, investors may be placing a bit too much potential on the stock. T
his could explain why shares of Square stock have fallen over the last year or so. It’s delivered, but not in a home run/knock it out of the park sort of way. That could continue to bite it in the end.
PYPL is growing- albeit more slowly- and features plenty of flexibility. All in all, PayPal should continue to reward shareholders without the volatility and risk that Square could poise.
In the end, the decision to buy SQ stock or PYPL shares comes down to what you’re looking for. A more value play or pure growth? Just keep in mind that the pure-growth option is very expensive when compared to the value play.
Disclosure: At the time of writing, Aaron Levitt did not have a position in any stock mentioned