Whenever we talk about long-term investing, we should aim to ride on “megatrends” that will grow no matter what happens in the global economy.
The companies operating within those spaces, and in particular the leaders, tend to have first-mover advantage.
In the fintech and digital payments space, that’s no different. Two of the biggest companies operating in that arena, at least in terms of digital payment wallets, have been PayPal Inc (NASDAQ: PYPL) and Square Inc (NYSE: SQ).
They’ve also been big winners over the past year. PayPal shares are up nearly 68% over the past 12 months while Square’s stock price has risen by an even better 166%.
It should be noted that PayPal is a much bigger company. It has a market capitalisation of nearly US$290 billion (more than a lot of big US banks), while Square is worth around US$92 billion.
But for long-term investors, which company is the better buy for the future? Let’s take a look.
Total payment volume
This is usually used as one of the key metrics for payments firms to measure how much money is flowing through their payments system.
While PayPal measures total payment volume (TPV), Square uses gross payment volume. Both companies have wildly-popular digital wallets (PayPal has Venmo while Square has Cash App).
During the first quarter of 2021, PayPal saw its TPV rise by 46% year-on-year to US$285 billion. Meanwhile, Square only saw a 29% year-on-year rise in gross payment volume to US$33.1 billion.
PayPal comes out on top on this front given its faster growth rate.
When dealing with growth companies, such as these two, we should always take a look at the rate of revenue growth.
Encouragingly, for both companies their growth has been solid although it is likely to slow in the quarters ahead as the US economy opens up again and both companies come up against tougher comparison numbers.
In the first quarter of 2021, PayPal managed to grow its net revenues by 29% year-on-year to US$6.03 billion. Looking at Square, the payments firm’s first quarter saw its net revenue hit US$5.06 billion, up a whopping 266% year-on-year.
However, Bitcoin revenue for Square skews numbers given its miniscule contribution to gross profit. Bitcoin revenue made up a whopping US$3.51 billion of that total number during the quarter but only contributed 2% of gross profit.
So, excluding Bitcoin revenue, total net revenue was US$1.55 billion – up 44% year-on-year. That revenue growth rate was still better than PayPal’s.
For these two fintechs, the “network effect” is important when using its payment and peer-to-peer payment apps.
As mentioned, PayPal has Venmo, which now allows users to trade crypto and has even come out with a co-branded credit card with JPMorgan Chase & Co (NYSE: JPM). At the end of 2020, Venmo had a sizeable 52 million users of its Venmo app.
Meanwhile, Square has Cash App, which acts almost like a deposit account. Cash App saw a surge in deposits in the first quarter on the back of stimulus cheques and also tax refunds for Americans. While also offering crypto trading, Cash App has 32 million users as at the end of 2020.
Buying the leaders
Overall, while PayPal comes out on top it doesn’t meant Square is a bad investment either. PayPal is the much larger company and has the much bigger network (plus international presence).
I see PayPal as the “safer” approach to the digitalisation of payments. Square, though, is growing extremely fast and has an interesting cryptocurrency growth angle to it – especially given how keen its co-founder and CEO Jack Dorsey is on Bitcoin’s future.
Both look like solid long-term investments but PayPal edges it for me given its massive user base, faster TPV growth and generally stronger fundamentals, such as free cash flow.
Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of PayPal Inc and Square Inc.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be.
In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.