While PayPal Holdings (NASDAQ:PYPL) has done quite well over both the past six months and the last year, Square (NYSE:SQ) has significantly outperformed. Even though the rival is a good deal more expensive than PayPal stock, it may be the better buy between the two right now.
Before exploring why that is, we should study the performance differences between these two payment company stocks. Then we can look at valuation differentials and then some conjectures as to why the pattern of Square’s outperformance might continue.
Square Consistently Outperforms PayPal Stock
In the last six months (thru Jan. 8), SQ stock has risen 81% versus PYPL stock’s 33.5% gain. And while PayPal is up an impressive 116% in the last year, but Square stock is up 257%. So, at least in the near past, Square stock has risen over twice as much.
Moreover, the same outperformance by Square holds for the past five years. For example, PYPL stock has done quite well. It is up 642% in five years, as of Jan. 8. That works out to an average annual return of 49.3% each year, on a compound basis. This is spectacular.
But if you had put the same amount of money into Square stock, your return would have been 2,034% in five years, basically doubling every year with a 97.9% average annual return.
That was the past. Will it continue? Hard to say, but even in the new year, the outperformance holds, as of Jan. 8, PYPL stock is up just 3.53% whereas Square stock is already up 10.94%.
Square Is Much More Expensive
The fact is PYPL stock trades for 54 times 2021 forecast earnings and 4.5 times sales, according to data on Seeking Alpha. However, Square is valued at much higher multiples than these.
For example, its forward P/E ratio is 212 times 2021 earnings per share (EPS) and 8.4 times sales. This is at least twice the valuation of PayPal, which is already very high. In other words, the market is very ebullient about PayPal’s future, but they are simply ecstatic about Square’s.
And why not? Square’s revenue and earnings forecast are about twice as high as PayPal’s. For example, PayPal is forecast to make $25.36 billion in revenue this year. This is a growth rate of 18.3% over the 2020 estimate of $21.43 billion. That is a respectable growth rate, but it is well below Square’s forecast rate.
For example, Square’s estimate is $13.o2 billion, or 39% over $9.37 billion forecast for 2020. So this growth rate is twice as fast as PayPal’s forecast rate — 39% vs. 18.3%. Therefore, Square stock now has a price-to-sales multiple almost twice that of PYPL stock — 8.4x vs. 4.5x.
So, I guess there is some kind of logic here, although it really seems to dismiss earnings valuation, and is more tuned to a price-to-sales metric.
So now we know that Square stock has done twice as good as PYPL stock and it has growth rates and valuation metrics twice as high as PayPal.
What To Do With PYPL Stock
Growth in its Cash App was the basis for my recent position on why Square stock will do well over the next year. Cash App is the number one downloaded finance app, although others are catching up fast. This is what is propelling Square’s growth.
I project that Square stock is likely to rise at least 400% or more over the next five years. I can’t have the same level of confidence about the appreciation of PayPal stock. Granted, everyone loves PayPal’s bitcoin-buying convenience feature, but you can do that on Cash App now as well.
Keep in mind that I recently wrote an article on PayPal predicting that it will rise at least 68% this year. But my prediction for Square stock is much better.
Therefore, I am going to stick with Square stock rather than PYPL — at least until I see the pattern of its outperformance change.
On the date of publication, Mark R. Hake has a long position in Square (SQ) stock.