Square Inc. (NYSE: SQ) and PayPal Holdings (NASDAQ: PYPL) are publicly traded payment technology companies Mr. Market under values. So which of these financial technology companies is the better investment?
Well Square is cheaper; its shares traded at $57.85 on 20 September 2019. Yet Square loses money, it reported a quarterly net loss of -$7 million on 30 June 2019.
In contrast, PayPal shares traded at $104.64 on 13 September 2019. However, PayPal reported a quarterly net income of $828 million on 30 June 2019.
Moreover, PayPal’s resources are greater than Square’s. For instance, PayPal made a gross profit of $1.961 billion on revenues of $4.305 in the quarter ending on 30 June 2019.
Meanwhile, Square generated a gross profit of $465 million on revenues of $1.174 billion in the same period. However, Square’s revenues grew at a rate of 44.05% during that quarter. Yet PayPal’s revenues grew at a rate of 11.82% during that period.
Which is Better Square or PayPal?
Thus both PayPal and Square are growing payment platforms but which is better?
Well PayPal is larger but Square is growing faster. Statista estimates PayPal had 286 million active accounts worldwide at the end of 2nd Quarter 2019. In addition, the number of active PayPal accounts grew by 17% between 2nd Quarter 2018 and 2nd Quarter 2019.
Furthermore, PayPal’s total payment volume grew from $139.4 billion in 2nd Quarter 2018 to $172.36 billion in 2nd Quarter 2019, Statista calculates. Hence, PayPal’s payment volume grew by 22% between 2nd Quarter 2018 and 2nd Quarter 2019.
Conversely, Statista estimates Square business loan volume grew from $472 million in 4th Quarter 2018 to $528 million in 2nd Quarter 2019. In addition, Square’s gross payment volume grew to $26.8 billion in 2nd Quarter 2019, Statista estimates.
Thus, PayPal is a far larger platform than Square and it makes money. Given these numbers, I consider PayPal the better stock.
Who Makes more Money Square or PayPal?
I consider PayPal a value investment, because the company’s shares are cheap but the company has a lot of cash.
For instance, PayPal reported an operating cash flow of $2.201 billion, a financing cash flow of $2.498 billion, and a free cash flow of $1.035 billion on 30 June 2019. However, PayPal reported a negative investing cash flow of -$5.957 for the same period.
In contrast, Square reported an operating cash flow of $165.84 million, and a free cash flow of $121.4 million on the same day. Moreover, Square reported a negative financing cash flow of -$42.41 million and an investing cash flow of -$95.75 million on the same day.
Payment Processors have a Lot of Cash
Consequently, Square reported cash and short-term investments of $1.372 billion on 30 June 2019. In detail, Square had $662.86 million in cash and equivalents and $708.72 million in short-term investments on that day.
Impressively, PayPal had $11.581 billion in cash and short-term investments on 30 June 2019. To elaborate, PayPal had $4.909 billion in cash and equivalents and $6.672 billion in short-term investments at the end of June 2019.
Given these numbers, payment processors are a value investment because they are cash-rich. PayPal is a very cash-rich company now, but Square could grow into a cash-rich company.
However, I do not think Square will grow as large as PayPal because it concentrates on business clients. PayPal; on the other hand, targets the mass market which will lead to more growth and cash.
PayPal looks beyond America with Project Libra
Currently, PayPal’s biggest challenge is to expand its successful peer-to-peer (P2P) payment app Venmo beyond the United States.
Venmo’s growth is impressive, its total payment volume doubled between 2nd Quarter 2018 and 2nd Quarter 2019. Specifically, Statista estimates Venmo had a total payment volume of $14 billion 2nd Quarter 2018 and $24 billion a year later. Statista estimates there were over 40 million Venmo accounts at the end of 1st Quarter 2019.
Despite the growth, Venmo is not widely available outside the United States. PayPal could change that with help from Facebook’s (NASDAQ: FB) Project Libra cryptocurrency scheme.
PayPal is part of the Libra Association, the organization that will administer Libra, a press release reveals. Importantly, the world’s two largest credit card providers MasterCard (NYSE: MA) and Visa (NYSE: V) are part of Project Libra.
How Project Libra Could Help PayPal cash in on Cross-Border Payments
Facebook intends Libra to be a worldwide blockchain payments platform anybody can access from any country with an app. For example, a person in Bolivia could use Libra tokens to pay for merchandise at a US e-commerce platform.
Theoretically, the Bolivian could purchase Libra coins with bolivianos; her national currency. The pay the American merchant with the Libra altcoin. The merchant could quickly redeem the Libra for U.S. Dollars. For instance, a Libra stablecoin could instantly release payment in dollars from a US bank account.
Thus, Libra could make cross-border payments faster, simpler, and less risky by eliminating direct conversion of fiat currencies. In particular, American or European merchants could avoid the risk of dealing in inflation-prone fiat currencies like the Egyptian Pound and the Argentine Peso.
Yet Argentines and Egyptians could quickly receive payments in their currencies. Under those circumstances, Venmo could operate in countries like Egypt and Argentina if it offered transactions in stablecoins or crytpocurrency.
Cross-border payments could be a lucrative business. A McKinsey report estimates global cross-border payment revenues for 2017 at $1.9 trillion. Moreover, McKinsey projects revenues from cross-border payments to grow to $20 billion in 2020. Notably, revenues from cross-border payments grew at a rate of 11% in 2017, McKinsey calculates.
Note the source of these numbers is the PDF: Global payments 2018: A dynamic industry continues to break new ground. Available at: https://www.mckinsey.com/
Therefore, it is easy to see why Mark Zuckerberg and PayPal are so interested in cross-border payments and cryptocurrency. I think McKinsey’s numbers show Project Libra could generate a lot of cash if it works and governments allow it.
How WhatsApp and Project Libra could take Venmo Global Fast
Moreover, Facebook has the resources to quickly offer Venmo to a global mass market.
Incredibly, one Facebook social media, WhatsApp had 500 million daily users for one feature WhatsApp Status in 1st Quarter 2019, Statista estimates. Plus Statista estimates the number of WhatsApp status users grew from 175 million in 1st Quarter 2017 to 450 million in 2nd Quarter 2018 to 500 million in 1st Quarter 2019.
I think those numbers show WhatsApp could offer Venmo to tens of millions of customers all over the world fast. Thus, PayPal could theoretically triple or quadruple Venmo’s total payment volume overnight using WhastApp and Libra.
Conversely, Square’s Money App P2P wallet could experience similar international growth if it could operate through WhatsApp. However, Square CEO Jack Dorsey tells The Sydney Morning Herald he hates the idea of a Square or Twitter (NYSE: TWTR) cryptocurrency.
Instead, Dorsey is a huge Bitcoin (BTC) fan who thinks that altcoin is the best bet to be the “internet’s native currency.” I think Dorsey is making a mistake because I think Bitcoin is too slow and clunky for mass adoption.
Thus, I think Dorsey is making a mistake that could limit his company’s growth potential. The mistake is not getting involved in Project Libra or cryptocurrency research and development at big banks like JPMorgan Chase (NYSE: JPM), BNY Mellon (NYSE: BK), or Goldman Sachs (NYSE: GS).
Which is Better PayPal or Square ?
Given Dorsey’s attitude, I think PayPal’s growth prospects are better than Square’s. Thus, PayPal is a better growth stock.
Neither PayPal nor Square pays a dividend so they are both lousy income stocks. However, if you are looking for cash-rich companies capable of a lot of growth, Square and PayPal are worth investigating.
I think payment processors will generate a lot of cash in the years to come because of new technologies, and PayPal (NASDAQ: PYPL) and Square (NYSE: SQ) will lead the pack. Thus both stocks are good long term growth investments for people who do not require an immediate income.