The surging inflation led to the Federal Reserve raising the benchmark interest rates four times this year. While the rising prices dampened consumer sentiment, a shifting spending trend led Americans to continue spending on travel, retail, and technology.
According to the Bureau of Economic Analysis. Expenditures on foreign travel were 89.3% higher in June than at the beginning of the year. This trend is expected to benefit payment stocks PayPal Holdings, Inc. (PYPL) and Visa Inc. (V) with increased spending through their platforms.
PYPL operates a technology platform that allows digital payments on behalf of merchants and consumers internationally. V operates as a payments technology company worldwide.
V has lost 10.1% over the past year versus PYPL’s 66% decline. However, in terms of the past month’s performance, PYPL is a clear winner with a 28.1% gain versus V’s 7.6% returns.
But which stock is a better buy now? Let's find out.
Latest Developments
In June, PYPL announced that it is expanding its suite of credit offerings to create a new business credit card to meet the everyday financing needs of small business owners. The PayPal Business Cashback Mastercard, issued by WebBank and powered by the Mastercard network, is the first business credit card offered through PayPal.
The card has no annual fee and rewards cardholders with 2% cash back on all purchases with no rewards earning caps or expiration, making it among the highest cashback rewards value available.
Also, in May, PYPL announced the pricing of its earlier announced offer to purchase for cash all of the company's outstanding notes listed. The offer refers to the applicable offer to purchase for cash the 2.200% Senior Notes due September 2022.
In May, V announced a partnership with Fundbox, an embedded working capital platform for small businesses, to strengthen Fundbox’s platform with the power of digital payments. The first step in this collaboration is the launch of the Fundbox Flex Visa Debit Card, issued by Pathward, N.A., which aids small business customers in better managing their cash outflows.
Recent Financial Results
For the second quarter ended June 30, 2022, PYPL’s net revenues increased 9.1% year-over-year to $6.81 billion. However, its non-GAAP net income decreased 20.8% from the prior-year quarter to $1.08 billion. Non-GAAP net income per share declined 19.1% from the same period the prior year to $0.93.
V’s net revenue increased 19% year-over-year to $7.28 billion for the third quarter. Its operating income grew 2.1% from its year-ago value to $4.15 billion, while its non-GAAP net income came in at $4.21 billion, up 29% from the prior-year quarter. The company’s non-GAAP EPS rose 33% year-over-year to $1.98.
Past and Expected Financial Performance
PYPL revenue grew at a CAGR of 17.6% over the past five years. Analysts expect PYPL’s revenue to increase 10.8% in the current quarter, 10.3% in the current year, and 14.3% next year.
On the other hand, V’s revenue grew at a CAGR of 9.6% over the past five years. Street expects V’s revenues to rise 15% in the current quarter, 20.4% in the current year, and 12% next year. The company’s EPS is expected to rise 12.3% in the current quarter, 21.3% in the current year, and 17% next year.
Profitability
V is more profitable, with a gross profit margin of 97.33% compared to PYPL’s 43.47%. Also, V’s 51.99% net income margin compares to PYPL’s negative net income margin of 68.6%.
Furthermore, V’s ROE, ROA, and ROTC of 39.85%, 14.09%, and 20.09% compare with PYPL’s negative returns of 10.11%, 3.05%, and 7.48%, respectively.
Thus, V is more profitable.
Valuation
In terms of forward PEG, PYPL is currently trading at 2.03x, 26.1% higher than V, which is currently trading at 1.61x. Moreover, PYPL’s forward P/E GAAP ratio of 60.76x is 97.6% higher than V’s 31.81x.
POWR Ratings
PYPL has an overall rating of D, which equates to Sell in our proprietary POWR Ratings system. On the other hand, V has an overall rating of B, which translates to Buy. 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 and Stability. Its Quality grade is in sync with the company's higher profitability. On the other hand, PYPL has a C for Quality, which is justified considering its bleak profitability. Also, V’s 0.90 beta is in sync with its Stability grade, while PYPL has a C grade for Stability, given its beta of 1.49.
Out of the 48 stocks in the D-rated Consumer Financial Services industry, PYPL is ranked #39, while V is ranked #7.
Beyond what we've stated above, we have also rated the stocks for Growth, Momentum, Quality, Momentum, and Sentiment. Click here to view PYPL’s ratings. Get all V ratings here.
The Winner
Increasing consumer spending on travel, retail, and technology despite the multi-decade high inflation could help payment companies like PYPL and V. However, V’s relatively lower valuation and higher profitability make it a better bet now.
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 $96.75 per share on Monday afternoon, up $1.43 (+1.50%). Year-to-date, PYPL has declined -48.70%, versus a -12.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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