Technology moves at a mile a minute these days. This is particularly true in the business world, which is rapidly evolving as a result of new and innovative companies that help companies handle their operations in better and more efficient ways. Look no further than some of the fintech companies that have risen to prominence over the last several years for truly disruptive technology.
If you are interested in adding a fintech company to your portfolio, you need to take a look at Square (NYSE:SQ) and Paypal (NASDAQ:PYPL). These are two companies that are completely changing the way that payment processing is handled. It’s fair to assume that physical cash will soon be a relic of the past since digital payment processing is much easier and more efficient. If you aren’t familiar with what fintech is, it’s a term that refers to a technology that is used to automate and provide innovation to financial services.
Both companies seem to be poised to continue their growth as more and more businesses shift to digital payment processing services in the future. There are positive catalysts occurring in the world that will likely accelerate the end of physical cash as we know it. Adding either one of these companies to your portfolio is a great opportunity to gain fintech exposure, but which one is the better opportunity? Let’s take a look at both stocks below and decide on the best option.
Before fintech, if you were a small business that needed a way to handle financial transactions remotely, you pretty much had to resort to cash-only. That was until Square launched and changed the way that small businesses were able to handle their remote payment processing. This company creates small plastic square dongles that fit easily into a smartphone or tablet and instantly provide the ability to handle remote payment processing for most major credit cards. Square describes its business as “A cohesive commerce ecosystem that helps sellers start, run, and grow their business”.
Square’s point-of-sale payment processing system is a compelling innovation, but the company also competes with Paypal thanks to its Square Cash Application. This app allows users to transfer money on their smartphones, similar to Paypal’s Venmo app. Both of these are exciting components of Square’s business and should continue seeing strong growth, especially when the economy returns to normal.
Some of the downsides about Square have more to do with near-term risk related to the global pandemic. We know how bad small businesses are being affected by the health crisis, and that is leading to far less payment processing with Square. Keep in mind that the majority of Square users are small business owners and mom-and-pop businesses. Also, the company’s Q1 earnings were a mixed bag, as the company beat revenue estimates but also reported first-quarter adjusted earnings per share loss of 24 cents which missed analyst expectations of a 13-cent EPS profit. There are investors that aren’t sold on Square’s CEO Jack Dorsey and his eccentric behavior. Although Jack Dorsey is undoubtedly an intriguing character, many believe that he is not fully focused on growing his companies.
If you are looking for a fintech stock that has a ton of positive momentum, look no further than Paypal. The company smashed their Q1 earnings report and experienced the biggest day in the company’s history in terms of transaction volume on May 1st. Combine that with the fact that Paypal has waned off competitors and remained the leader in online payments over the past decade and you have very attractive investment potential.
Some of Paypal’s figures that investors should be intrigued with include its total active accounts growth of 17% year-over-year and its $4.62 billion year-over-year revenue growth in Q1. They also have a strong balance sheet and are generating huge growth in operating cash flow, with 46% year-over-year growth in Q1. Paypal’s cash, cash equivalents, and investments totaled $12.6 billion as of March 31, 2020, which means they are well-positioned to continue investing in growth and handle the economic uncertainty going forward.
This is a business that continues to flourish and remain a leader in the fintech industry regardless of new competition. Keep in mind that Paypal powers many e-commerce businesses as well, which bodes well for them going forward as that industry continues its rapid expansion.
Paypal vs Square: Which One is the Right Buy?
Although both of these businesses should benefit greatly from shifts in how businesses handle payment processing in the coming years, there is one clear winner in terms of which one you should consider adding to your portfolio today. You might be attracted to the lower stock price of Square, but the truth is that Paypal has a much more proven business model, more momentum, and a better management team. Their earnings and user growth from Q1 were quite impressive, and Paypal has a nice track record of making smart acquisitions. Although Paypal’s stock price jumped significantly after its earnings report, it’s a company that still has a lot of room to grow and is absolutely worth a look at this time.
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