PayPal Holdings, Inc. (PYPL) acts as a technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. Its payment solutions include PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products. On the other hand, Payments technology company Visa Inc. (V) facilitates digital payments among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a transaction processing network.
The credit services industry suffered because of the near-zero interest rate environment and lower consumer spending amid the pandemic. However, the sector has witnessed a solid recovery from increased credit transactions and rapid technological innovation. Also, the Federal Reserve approved a 0.25 percentage point rate hike, the first increase in more than three years. And the robust March jobs growth might give the Federal Reserve the green light to get more aggressive with its interest rate hikes to drive down inflation, which should help the credit services companies generate solid revenues. Therefore, both PYPL and V should benefit.
PYPL has gained 22% over the past month, while V returned 13.7%. However, V’s 2.4% gains over the past three months compared to PYPL’s negative returns. Moreover, in terms of the past year’s performance, V is the clear winner with 5.1% gains versus PYPL’s negative returns.
But which of these two stocks is a better buy now? Let’s find out.
On March 10, 2022, V announced it had acquired Tink. Charlotte Hogg, CEO of Visa Europe, said, “Digital tools are driving the new economy, and the combination of Visa and Tink will support greater choice and quality of digital money services as the lines between commerce, financial services and payments continue to converge.”
On June 30, 2021, PYPL announced the launch of PayPal Zettle in the U.S., a digital point-of-sale solution that enables small businesses to seamlessly sell across in-person and online channels. Jim Magats, SVP, Omni Payments, PYPL, said, “We believe in the power of small businesses, and we will leverage PayPal Zettle to better serve in-person businesses and enable them to go digital seamlessly.”
Recent Financial Results
V’s net revenue increased 24% year-over-year to $7.10 billion for the fiscal first quarter ended December 31, 2021. The company’s non-GAAP net income grew 25% year-over-year to $3.90 billion. Also, its non-GAAP EPS came in at $1.81, up 27% year-over-year.
PYPL’s net revenue increased 13% year-over-year to $6.92 billion for the fiscal fourth quarter ended December 31, 2021. The company’s non-GAAP net income grew 3% year-over-year to $1.32 billion. Also, its non-GAAP EPS came in at $1.11, up 2.8% year-over-year.
Past and Expected Financial Performance
V’s revenue and EPS grew at CAGRs of 6.2% and 9.1%, respectively, over the past three years. Analysts expect V’s revenue to increase 18.9% in fiscal 2022 and 13.7% in fiscal 2023. The company’s EPS is expected to grow 18.1% for the quarter ending June 30, 2022, and 20.6% in fiscal 2022. Moreover, its EPS is expected to grow at a rate of 18.4% per annum over the next five years.
On the other hand, PYPL’s revenue and EPS grew at CAGRs of 18% and 27.2%, respectively, over the past three years. The company’s revenue is expected to increase 15.8% in fiscal 2022 and 19.7% in fiscal 2023. Its EPS is expected to decline 2.6% for the quarter ending June 30, 2022, but grow 1.1% in fiscal 2022. PYPL’s EPS is expected to grow at a rate of 17.3% per annum over the next five years.
V’s trailing-12-month revenue of $25.48 billion is higher than PYPL’s $25.37 billion. V is also more profitable with a gross profit margin and net income margin of 97.07% and 51.59%, compared to PYPL’s 46.99% and 16.43%, respectively.
Furthermore, V’s ROE, ROA, and ROTC of 35.59%, 13.03%, and 18.27% compare with PYPL’s 19.95%, 3.69%, and 8.80%, respectively.
In terms of forward EV/EBITDA, V is currently trading at 24.13x, 35.9% higher than PYPL’s 17.75x. Moreover, V’s forward non-GAAP P/E ratio of 31.99x is 22% higher than PYPL’s 26.23x.
So, PYPL is the more affordable stock.
V has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. On the other hand, PYPL has an overall rating of C, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
V has a grade of B for Quality. This is justified given its trailing-12-month gross profit margin of 97.07%, 94.5% higher than the industry average of 49.91%. PYPL, on the other hand, has a Quality grade of C, consistent with its 46.99% trailing-12-month gross profit margin, 5.9% lower than the industry average of 49.91%.
V has a B grade for Sentiment, in sync with analysts’ expectation that its EPS will increase in the upcoming months. PYPL, on the other hand, has a grade of C for Sentiment, consistent with its analysts’ expectation that its EPS will decline in the near term.
Of the 51 stocks in the Consumer Financial Services industry, V is ranked #7, while PYPL is ranked #39.
The credit services industry is well-positioned to benefit from the upcoming interest rate hikes. While both V and PYPL are expected to gain in the long run, it is better to bet on V now because of its higher profitability and better growth prospects.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Financial Services industry here.
PYPL shares were trading at $112.54 per share on Wednesday afternoon, down $5.11 (-4.34%). Year-to-date, PYPL has declined -40.32%, versus a -5.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Nimesh Jaiswal
Nimesh Jaiswal’s fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More…