A rise in internet penetration, the higher adoption rate of smartphones, and an increase in e-commerce sales, alongside rising government initiatives to digitize payments, are driving the growth of digital payments.
According to a Grand View Research report, the digital payment market was worth $58.3 billion last year and is expected to grow at a compounded annual growth rate of 19.4% between 2021 and 2028.
Using the TipRanks stock comparison tool, we will compare the two companies, PayPal Holdings and Square, and examine how Wall Street analysts feel about these stocks.
PayPal Holdings (NASDAQ: PYPL)
PayPal is a digital payments company that enables person-to-person (P2P) payments through PayPal, Venmo, and Xoom products and services. The company’s Honey platform is a suite of free tools that simplifies and personalizes the shopping experience for its consumers.
Around three days back, the company announced that its payment platform, Venmo, will begin to roll out new types of payments. Furthermore, the company will expand purchase protections to facilitate the safe dispatch and receipt of payments.
From now on, payments tagged as goods and services will be covered under Venmo’s Purchase Protection Program. That means the buyer and seller might be covered if the transaction doesn’t go smoothly.
In May, the company made some key changes to its seller user agreement in the United States, for the first time in 21 years. Effective from August 2 this year, PYPL will charge sellers 3.49% plus 49 cents to process transactions performed via its products, such as PayPal Checkout, Pay with Venmo, PayPal Credit, and the buy-now-pay-later offering Pay in 4. (See PayPal Holdings stock chart on TipRanks)
Following the announcement, Deutsche Bank analyst Bryan Keane reiterated a Buy and a price target of $310 (6.4% upside) on the stock. Keane said in a note to investors, “The pricing changes likely only impact US SMBs as mid- large merchants tend to have special discounted pricing agreements (although we wouldn’t be surprised to see similar pricing changes to come internationally to SMB [small-to-medium business] by next year).”
The analyst also said that the pricing changes could result in a “~4% annual revenue tailwind with essentially 100% margin.”
According to Keane, PYPL’s rate hike is an increase of approximately 27% from its earlier rates, but the company believes that this rate hike is justified. Paypal touts the higher security benefits of using its services, and also points out that customers are thrice more likely to complete their purchases when PYPL as a payment method is available at checkout.
According to the new seller user agreement policy, PYPL will charge 2.29% plus 9 cents for every in-person credit and debit card transaction. Analyst Keane stated that these rates are comparable to Square (SQ), “who charges 2.60% + $0.10 per transaction for in-person credit and debit payments on its network.”
The analyst added that PYPL “is reducing pricing for in-person transactions made on its network in order to better compete with players like Square.”
Yesterday, the company launched PayPal Zettle in the United States. This new product is a digital point-of-sale solution targeted towards small businesses, which will expand Paypal’s service offerings.
In Q1, PYPL reported the strongest first quarter results in its history. It announced a total payment volume of $285 billion, up by approximately 50% year-over-year. The company posted net revenues of $6.03 billion, a jump of 31% year-over-year. Furthermore, it reported non-GAAP earnings of $1.22 per share, up 84% year-over-year.
Consensus among analysts on Wall Street is a Strong Buy based on 21 Buys and 3 Holds. The average PayPal price target of $317.87 implies approximately 9.1% upside potential to current levels.
Square (SQ)
Square is a digital payments company that provides point-of-sale software and other business services, including reporting and analytics, that enable sellers to accept card payments. Through the company’s Cash App, people can store, send, receive, spend, and invest money.
In May, the company closed the private placement of a $2 billion offering of senior notes to foreign institutional buyers. It intends to use the net proceeds of this offering for general corporate purposes.
In Q1, SQ posted total net revenues of $5.06 billion, a jump of 266% year-on-year. Excluding revenue from bitcoin, total net revenue was $1.55 billion, an increase of 44% year-on-year. The company reported adjusted net income of $0.41 per share, topping analysts’ estimates of $0.17 per share.
The company stated its reasons for deducting bitcoin revenue from total revenues in its shareholder letter, saying, “We deduct bitcoin revenue because our role is to facilitate customers’ access to bitcoin. When customers buy bitcoin through Cash App, we only apply a small margin to the market cost of bitcoin, which tends to be volatile and outside our control.”
The company’s investment in bitcoin has paid off handsomely, as bitcoin revenues made up 69.4% of total revenues in Q1. Square has invested $220 million in Bitcoin so far.
Last month, Deutsche Bank analyst Bryan Keane reiterated a Buy with a price target of $330 on the stock. Keane commented, “SQ has morphed into a two sided financial ecosystem that continues to expand TAM [total addressable market] and beat expectations and we see continued momentum on the horizon…”
He added, “We believe SQ remains well positioned to benefit from the accelerated adoption of digital financial services, software-based business solutions, and omni-channel capabilities spurred by the COVID pandemic.”
The analyst is bullish on the company’s Cash App, as in Q1, gross profit from the company’s cash app popped 171% year-on-year to $495 million.
According to Keane, the reason behind the strong performance of the app has been Square’s improved monetization and product adoption for the app. Those upgrades have attracted new users and simultaneously increased user engagement for the app’s existing users.
Keane believes that the Seller ecosystem of SQ will continue to grow as the company expands its service offerings, especially to larger merchants. (See Square stock chart on TipRanks)
In April, the Seller ecosystem’s gross purchase volume (GPV) was up 144% year-over-year, indicating a two-year compounded annual growth rate (CAGR) of 21% for Seller GPV. In Q2, management expects that the seller ecosystem’s gross profit will continue to rise.
Consensus among analysts on Wall Street is a Moderate Buy based on 18 Buys, 5 Holds, and 1 Sell. The average Square price target of $284.23 implies approximately 16.6% upside potential to current levels.
Bottomline
While analysts are bullish about PYPL, they are cautiously optimistic about SQ. Based on the upside potential over the next 12 months, SQ seems to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
