The COVID-19 pandemic has exacerbated e-commerce growth and with it the need for the adoption of digital payment methods. The global digital payment market could grow to $154.1 billion by 2025, reflecting a CAGR (or compound annual growth rate) of 14.2% from 2020, according to market estimates.
Payment platforms like PayPal and Square are benefiting from rapid demand for contactless payments since the pandemic while Visa and Mastercard are grappling with a decline in travel and entertainment spending. We will use the TipRanks Stock Comparison tool to place PayPal and Mastercard alongside each other to see which stock offers a more compelling investment opportunity.
PayPal Holdings (PYPL)
Paypal has emerged as a leading player in the digital payments space. The company, which was spun off from eBay in 2015, now boasts 361 million active accounts with 15.2 million net new active accounts added in 3Q.
Earlier this month, PayPal reported upbeat 3Q results but investors were disappointed with the company’s 4Q guidance. The company’s 3Q revenue rose about 25% Y/Y to $5.46 billion and TPV (Total Payment Volume), which indicates payments processed through the PayPal platform, grew 38% to $247 billion. The top-line gained from robust growth in e-commerce and digital payments, while travel volumes continued to be weak.
Meanwhile, 3Q adjusted EPS increased 41% Y/Y to $1.07 with adjusted operating margin expanding 377 basis points to 27.2%. (See PYPL stock analysis on TipRanks)
Looking ahead, the company believes that it is on track to end the year with 70 million net new active accounts. It expects revenue growth (on a spot rate basis) of 20%-25% in 4Q and 20%-21% for the full-year. Paypal anticipates adjusted EPS growth in the range of 17%-18% in 4Q and 27%-28% for the full-year.
PayPal sees strong growth prospects in its Venmo mobile payment platform. Venmo had 65 million users in 3Q and its TPV increased 61% to $44 billion during the quarter. The company expects Venmo revenue to generate $900 million in 2021 driven by investments in new capabilities. It aims to complete the roll out of Venmo credit card in the first quarter of 2021.
To further boost its revenue and promote touchless payments, PayPal launched QR Code technology in 28 markets globally in May. Ten major retailers, including CVS, Nike and Bed, Bath & Beyond, have signed up for the company’s QR Code solution and PayPal is in discussions with over 100 large retailers regarding this tool.
In addition, PayPal is now entering the crypto market and recently announced a new service that will allow its account holders to buy, sell and hold cryptocurrencies. The company is initially offering this service in the U.S. and intends to expand it to select international markets in the first half of 2021.
On Nov. 10, Mizuho Securities analyst Dan Dolev lowered his price target on the stock to $270 from $290, but reiterated a Buy rating. The analyst noted that the 9% selloff in Paypal shares on Nov. 9 was caused by a favorable update by Pfizer on its COVID-19 vaccine and concerns about mean reversion in e-commerce consumption patterns.
However, Dolev feels that such concerns are “overblown” and stated that “Our PayPal & Venmo QR checkout survey, coupled with upbeat early adoption data, suggest QR POS checkout can boost 2021 TPV growth by 3%+, followed by a 10-15% medium-term opportunity.” The analyst remains bullish about PayPal but lowered his price target due to “eBay’s transition to managed payments, which drives pressure on the take rate and is well flagged; we believe it is 100% transitory and won’t affect PYPL’s long-term strong fundamentals.”
Overall, the Street shares Dolev’s bullish outlook. The Strong Buy analyst consensus is based on 26 Buys versus 4 Holds. The average price target stands at $225.50, reflecting an upside potential of 17.2% in the coming year. Shares have advanced 78% so far this year.
Mastercard (MA)
Mastercard along with its closest rival Visa dominates the global credit and debit cards market. It has a presence in over 210 countries through its 2.7 billion Mastercard and Maestro-branded cards. However, the COVID-induced crisis in travel spending and cross-border transactions have dragged the company’s business down in recent months.
The company’s 3Q revenue and earnings lagged analysts’ expectations and declined from the year-ago quarter. Notably, revenue fell 14% Y/Y to $3.84 billion as cross-border volume fees plunged 48% (declined 36% on a local currency basis). Mastercard experienced some improvement in domestic travel spending in the quarter, including on categories such as lodging and restaurants. But, cross-border travel remained constrained.
In a bright spot, switched transactions (indicate the number of transactions initiated, authorized, cleared and settled through Mastercard network), grew 5% in 3Q boosted by an increase in cashless payments. Overall, adjusted EPS fell 26% Y/Y to $1.60 in 3Q as lower revenue weighed on the bottom line. Looking ahead, the company is seeing signs of improvement but feels that recovery will take time and will be positively impacted by the availability of effective COVID-19 therapeutics and vaccines.
In reaction to the 3Q earnings release, RBC Capital analyst Daniel Perlin lowered the stock’s price target to $350 from $372 but reiterated a Buy rating. The analyst noted that the 3Q earnings underperformance reflects how the global travel recovery can “weigh heavily” on Mastercard’s business model. Perlin lowered his FY20 EPS forecast by $0.29 to $6.30 and his FY21 EPS estimate by $0.48 to $8.05, but continues to have a positive outlook on the stock over the longer-term. He believes that investors should focus on “secular-driven stories that provide solid organic growth”.
Meanwhile, Mastercard is taking several initiatives to capitalize the accelerated shift towards electronic payments. The company has launched Shop Anywhere and AI Powered Drive Through solutions that will help its retail, entertainment and hospitality partners execute touch-free transactions. (See MA stock analysis on TipRanks)
The company recently extended its partnership with PayPal to offer Mastercard Send Instant Transfer service to nine European markets following a successful launch in the U.S. and Singapore. This service allows PayPal customers to cash out funds from their PayPal wallets to their Mastercard cards in real-time.
The company has also collaborated with Samsung and SoFi to launch Samsung Money by SoFi, a mobile-first money management platform. Furthermore, it has accelerated its Crypto Card Partner Program and has awarded Wirex a principal membership license thus making it the first native cryptocurrency platform to issue Mastercard payment cards.
The rest of the Street has a bullish stance, assigning a Strong Buy analyst consensus based on 19 Buys and 3 Holds. With shares up 11.3% year-to-date, the average price target of $361.28 indicates upside potential of 8.7% in the months ahead.
Conclusion
Both PayPal and Mastercard are well-positioned to benefit from the growth in digital payments. Looking at the recent financial results, PayPal has fared better than Mastercard. What’s more, PayPal stock has outperformed Mastercard so far this year and offers bigger upside potential, which for now makes it the more attractive pick.
To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
