MStudioImages/E+ via Getty Images visa inc. (nyse:v) and paypal holdings, inc. (nasdaq:pypl) are two of the world’s largest and most dominant paying players. Their business models differ, but both are poised to benefit from industry tailwinds and rising consumer spending around the world. In this article, we’ll pit them against each other to see which pick might be the best fit for different types of investors. Reading: Visa or paypal stock The two companies are not identical, but they do share many similarities. First, both companies belong to the biggest players in their industry: PayPal is valued at $220 billion. visa is even more valuable, trading at a market capitalization of $450 billion today. Visa is a payment technology company that makes money primarily through its card payment processing network that enables payments between consumers, merchants and businesses. paypal is more “technological” and offers digital/app-based payment solutions and consumer-to-consumer transactions to its users. Both companies benefit from global megatrends such as increased e-commerce sales, digitization and decreased use of cash. E-commerce transactions naturally can’t be done in cash, so consumers have to use credit cards, bnpl, or app-based services like PayPal to make payments. With e-commerce sales trending higher before the pandemic, during the pandemic, and likely post-pandemic as well, both companies should benefit from this macro tailwind. Likewise, both visa and paypal are positioned to benefit from the decline in the use of cash around the world. in some countries, like sweden or south korea, the vast majority of transactions are done without cash: Non-cash usage weforum.com See also: General 28 what is onlyfans stock name best now in other countries, that portion is much smaller, like in the philippines, germany or india. Over time, countries with a higher percentage of cash use, such as India, are likely to increase their non-cash use. this should be a tailwind for all non-cash paying players including visa and paypal. Other similarities between visa and paypal include that both companies are enjoying strong business growth rates and both are trading at a higher valuation. however, higher valuations for faster growing companies may be warranted, so this should not be seen as a deal breaker. Because the market is not very optimistic about payment companies and fintech players today, both paypal and visa have seen their shares fall over the last year: Over the last six months, Visa Inc. has seen its shares drop by around 15% from the high. PayPal, meanwhile, experienced a steeper downturn, dropping more than 40% from its high. The fintech/payment industry as a whole has experienced steep declines as well, showcased by the 30% drop in the Global X Fintech ETF (FINX). To some degree, these declines were driven by pretty high valuations before the sell-off, which particularly holds true for PayPal. The fact that the industry is not overly exposed to reopening efforts likely also plays a role in the recent underperformance. Investors seeking more reopening exposure likely shifted funds to industries such as energy or industrials, and away from industries such as payment/fintech. an important factor to evaluate these companies is their growth rate: Based on current estimates, Visa is forecasted to see its revenue grow 17% this year, while revenues are forecasted to come in at $32 billion. Meanwhile, PayPal is seen growing its revenue by a very comparable 18%, while the forward revenue estimate stands at $36 billion. PayPal is thus, in terms of revenue generation, the bigger company, while growth is pretty even across both companies. It’s also important to look at what these companies do with their revenue and how much of it ends up in cash on their balance sheets. in that sense, visa seems to be the strongest option: Visa’s cash profit margin, at 60%, is outstanding. Almost no company in the world manages to generate $0.60 in free cash flow for every dollar it generates in revenue. The explanation for this very high cash margin is that Visa’s business scales very well thanks to low proportional costs. As a dominant player in its industry with huge scale advantages, Visa is able to capitalize on its existing technology and generate extremely attractive free cash flows. PayPal does generate a way lower cash flow margin, at around 20%. That is, in absolute terms, still very decent, but the vast discrepancy compared to Visa is striking. Not surprisingly, Visa has generated a way higher free cash flow over the last year, at $15 billion, compared to $5 billion at PayPal – despite pretty similar revenues. See also: Top 29 will teladoc stock go up hottest visa’s large cash generation allows the company to return large amounts of money to its owners, whereas this has not been the case with paypal so far: Visa’s shareholders get a dividend, although with a meager yield, at only 0.7%. At the same time, Visa has bought back 11% of its shares over the last five years alone, while PayPal, which is not paying any dividends, has bought back 2% of its shares over the last five years. Visa Inc. announced a new $12 billion buyback program one month ago, which is enough to cover 3% of Visa’s shares. PayPal Holdings had announced a $10 billion program in 2018 but has not been very active in reducing its share count, as can be seen in the above chart. both paypal holdings and visa inc. combine a wide range of positive aspects. they have strong brands, benefit from industry tailwinds and, thanks to their large size, have scale advantages over their smaller peers. Both companies also have a compelling growth track record, and both companies can be expected to continue to grow at an attractive rate. this generally makes them attractive long-term holdings, although investors should not neglect valuations. even high quality companies like paypal and visa can be too expensive if they are trading at extraordinarily high valuations. today, visa inc. it trades at 31x this year’s earnings and 25.5x next year’s earnings, based on an eps forecast of $8.42. a 31x earnings multiple for the current year is far from low, but once we factor in the strong growth forecast for the year ahead, the valuation looks more reasonable. On the back of macro tailwinds such as rising consumer spending and rising e-commerce sales, Visa will see encouraging long-term growth. In the short term, the company will also get a boost from the recovery in global travel. Increased spending by international travelers will lead to increased cross-border visa transaction fees, which is why growth in the coming years is forecast to be strong. Paying around 25 times net profit (based on next year’s forecast) for a quality company with favorable growth winds doesn’t seem unreasonable to me, although Visa is not a bargain. At $190, where Visa traded in December, the stock was even more attractive. paypal is more expensive than visa, currently valued at 39 times this year’s earnings. Looking at next year, like we did with the visa, we get an earnings multiple of 34. That translates to a 30% to 40% premium over the visa, which I don’t think is really justified. paypal is even smaller and therefore has more growth potential in relative terms. The company is also forecast to grow slightly faster this year and could see more margin expansion on the upside. but on the other hand, its cash flows and cash returns are weaker than visa’s, and it also doesn’t have as established a brand as visa’s. Both stocks look attractive on a fundamental basis and because of their business models and prospects. visa is the somewhat slower growing selection that offers higher and more reliable shareholder payouts, which may be attractive to certain types of investors. paypal is the fastest growing option, but it is not generating cash flows comparable to what visa is doing. visa offers investors greater exposure to the credit card space. I think there is considerable growth potential in this area in the future, especially in international markets where cash transactions are still very common. PayPal’s business is “younger” and hipper, and its app-based solutions could see further growth in the coming years. however, I do not think this justifies the current spread between the valuations of the two companies. after all, the expected growth for next year, 17% for visa and 18% for paypal, are quite similar. so i think visa, at 25x next year’s earnings, is the better option than paypal, trading at 34x next year’s earnings. In general, the payment space is attractive and it does not hurt to have investments in more than one company in this industry. therefore, I think that having a stake in both companies is not a bad idea. I already own visa stocks and I think it’s the best choice for someone who wants to have exposure to a single company in this space. but paypal as an addition to that might be a good idea. pypl isn’t cheap, but it’s a lot cheaper than it used to be, and in the long run, the current valuation might be justified. So I’m thinking of adding paypal holdings to my portfolio, even though visa is the “core” position in the checkout space for me. I invite all readers to share your thoughts on these two stocks and the industry in general in the comments section! See also: General 20+ apple stock buyback 2016 best
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