Digital payments are becoming more prevalent around the world as demand for cash dissipates and the rise of digital wallets continues. According to PwC, the number of cashless transactions is expected to skyrocket from 1 trillion in 2020 to over 3 trillion in 2030. This will also likely contribute to the continued rise in peer-to-peer digital payments, which have also exploded. in popularity. in recent history.
So which businesses will benefit from the rise of digital payments? While there are plenty of players out there, two Motley Fool contributors take a look at the top dogs in the fintech industry and see which is the best buy today: To block (SQ -2.70%) Where PayPal Credits (PYPL -2.54%).
Block: A more diverse approach to fintech
Jamie Louko: Unlike PayPal, which has only one booming business category, Block offers services aimed at consumers and services aimed at businesses. PayPal is known for Venmo, the leading peer-to-peer payment platform. However, in terms of products for business operations, Block thrives. The company’s product ecosystem for merchants generated $661 million in gross profit in the first quarter, driven by some emerging opportunities.
The first path to growth for Block’s Square’s payment ecosystem is to move upstream. Block is trying to gain traction among large companies — which are more lucrative and have lower churn than small and medium-sized businesses — which it is doing. In Q1 2022, 35% of Square’s gross payment volume (GPV) came from sellers generating $500,000 or more in annual GPV. That was up from 30.5% a year ago. In other words, the Square ecosystem is seeing rapid adoption among bigger and bigger sellers.
The second opportunity for the Square ecosystem is the international marketplace. In the first quarter of 2021, only 8% of Square’s gross profit came from outside the United States. However, after Square entered new regions and introduced more products to its existing international markets, international gross profit accounted for 12% of Square’s total gross profit in the first quarter of 2022.
Block also owns a dominant peer-to-peer payment platform, Cash App. It generated $624 million in gross profit in the first quarter, which climbed 26% year-over-year. It also announced new features like easy deposit for teens – allowing teens to deposit paper money in Cash App at stores like walmart (WMT 1.95%). This could further increase Cash App customer loyalty for this emerging consumer demographic, potentially allowing Block to build lifetime users.
Block’s valuation of 7.7 times gross profit is higher than PayPal’s valuation of six times gross profit, but given Block’s growth rate, it makes sense that it would have a slight premium. In the first quarter of 2022, Block saw a 34% year-over-year gross margin increase, while PayPal saw a 5% decline over the same period. Ultimately, Block went on to be immensely successful and is capitalizing on his potential. With a lot more wiggle room than PayPal, Block looks like a better buy for long-term investors.
PayPal: The original and still on top
Jennifer Sabil: PayPal has been around since 1998, making it practically a dinosaur by tech standards. This gave it ample time to refine its model, expand its services, and add millions of customers. Today, it has over 400 million active accounts, surpassing all of its competitors, and it’s still adding millions every quarter. To put that into perspective, that’s more than the populations of the United States and Canada. combined.
In Q1 2022, PayPal added 2.4 million new net active accounts and is expected to add 10 million more in 2022. Even though sales growth is slowing after some of its all-time best quarters, sales are still expected to increase by double-digit percentages in 2022.
No one stays on top without upgrading, and PayPal has done a great job of improving through acquisitions and new product development. Its acquisition of Venmo in 2013 removed its biggest peer-to-peer payments competitor at the time and created a dominant force in the industry. It has acquired several other platforms that add value to both its digital payments and merchant services. Last year, it unveiled an improved mobile app intended to be a one-stop-shop for financial services, offering digital payments, bill paying, savings accounts and more.
All of this has led to a dominant company with nearly $26 billion in revenue over the past 12 months – and best of all – a very profitable business. Earnings per share rose 19% to $4.60 in 2021, and while earnings were under pressure in 2022, EPS still hit a positive $0.88 in the first quarter.
Shares of PayPal have fallen 63% this year and are trading at just 19 times forward year-on-year earnings, making it incredible value right now and a great long-term pick.
The best digital payment stock?
While Block is certainly the fastest growing company, it might not be suitable for all investors. For those looking for an indicator that is likely to stay strong but may not experience the highest growth rates, PayPal seems like a good stock to own.
Conversely, if your portfolio can handle a bit more risk and you take a diversified approach, Block could provide robust returns over the next decade. However, both companies are high quality businesses, so owning one or the other (or both) would probably be a smart move.