PayPal vs. Square

Investment Analysis Clubs Saul’s Investing Discussions
1

A week or so ago, Bear and Strelna asked questions about PayPal and their partnerships with Mastercard and Visa. I asked for a few days to finish an article on that subject and said I would then be happy to answer any questions. I had also wanted to buy more shares of PayPal, so I needed to keep quiet for disclosure purposes.

Anyway, my shares were purchased earlier this week and the article was published today:

After years of strained relationships between itself and the major payment networks, PayPal Holdings Inc (NASDAQ:PYPL) finally reached groundbreaking multiyear deals with both Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V) last year.

According to both deals, PayPal will allow consumers to choose their Mastercard and Visa credit cards as a preferred option of payment. PayPal also agreed to share data with the credit card companies and their card-issuing banks. In return, PayPal’s digital wallet will be accepted wherever Mastercard or Visa contactless payments are accepted at physical retail locations.

PayPal CEO Dan Schulman defended these deals because they offer PayPal customers more choices in an effort to prioritize customer needs.

Read the whole thing at http://www.fool.com/investing/2017/01/06/2-numbers-paypal-in…

Anyway, I would be happy to answer any questions on PayPal now.

One of the reasons I am hesitant about Square, is because I think PayPal is a better investment in the exact same space. Granted, it might not have quite as much upside as Square, but I believe it has far less risk and plenty of growth ahead. In many ways PayPal’s vision is the same as Square’s, except they have a huge head start and have already proven the profitability of their platform.

Braintree does nearly everything Square does on the payment processing side. Venmo seems to be growing faster than Square Cash. And none of this even touches upon PayPal’s flagship program and its dominant position in e-commerce: http://www.fool.com/investing/general/2016/12/14/an-obvious-…

Here’s a look at PayPal’s numbers:


Revenues (millions)			Q1		Q2		Q3		Q4	
2014					1874		1983		1971		2193	
2015					2137		2297		2258		2556
2016					2544		2650		2667

EPS (non-GAAP)			        Q1		Q2		Q3		Q4
2014					0.27		0.28		0.24		0.28	
2015					0.29		0.32		0.31		0.36	
2016					0.37		0.36		0.35

2016 Q3 Earnings

Revenue Growth (billions)
2015 Q3 TTM Revenue = 8.885
2016 Q3 TTM Revenue = 10.417
YOY Revenue Growth = 17.2%, previous Q 16.4%

EPS Growth
2015 Q3 TTM EPS = 1.2
2016 Q3 TTM EPS = 1.44
YOY EPS Growth = 20%, previous Q 23.9%

P/E (Check Current Price) = 40.09/1.44 = 27.84

1YPEG = 27.84/20 = 1.39


# of Active Accounts (millions) 		Q1		Q2		Q3		Q4
2014						148		152		157		162
2015						165		169		173		179
2016						184		188		192

Payment Transactions (millions)		        Q1		Q2		Q3		Q4
2014						918		930		972		1144
2015						1123		1161		1216		1428
2016						1414		1448		1512

Payment Transactions Per Active Account	        Q1		Q2		Q3		Q4
2014						23		23		24		24.5	
2015						25.2		26.1		26.9		27.5
2016						28.4		29.4		30.2

Total Payment Volume	(billions)		Q1		Q2		Q3		Q4
2014						53.676		56.736		58.184		66.039
2015						63.021		67.482		69.738		81.523
2016						81.056		86.208		87.403

Transaction Margin (percentage)		        Q1		Q2		Q3		Q4
2014						65.0		65.7		63.1		63.5	
2015						64.2		63.8		62.3		61.1
2016						60.4		59.8		58.7

Operating Margin (%)(non-GAAP)		        Q1		Q2		Q3		Q4
2014										18.4		20.4
2015						22.1		22.6		19.9		20.8
2016						21.1		19.9		18.4

There are, I believe, a lot of upcoming catalysts for PayPal too. Its international remittance platform, Xoom, is projected to become profitable this year. Thus far it has been a drag on earnings.

Pay with Venmo will allow Venmo account holders to begin using the popular app to make purchases at different retail locations.

PayPal’s One Touch continues to set online sale conversion rates on fire.

Now, none of this is to disparage Square. When Bear first brought the company to the board I didn’t think I was going to be impressed with the company. I was wrong.

As I’ve said previously, Dorsey’s vision for payments solutions was much more robust than I originally thought. This is far more than a hardware company selling mobile card readers. I love that they offer their payment processing customers other things like loans and human resource services.

I like that just like Braintree, PayPal’s online payment processing service, Square allows merchants to customize their checkout experience. Or that for a 1% fee, Square will deposit their customers’ money into their accounts the same day. It’s good stuff. I think it has potential. And getting in now could be really lucrative.

But I think an investment in PayPal comes with almost just as much growth and less risk.

Sorry for the rambling again :slight_smile: This post honestly began as just a way to ask if there were still questions on PayPal and just grew into another unwieldy mess. So still considering Square, but longer PayPal.

Matt
Long PYPL
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

23 Likes
2

Congrats on the article Matt. Nice.

I’d like your opinion on the affect of Hensarling’s (R TX) bill to repeal the debit card swipe fee cap on PayPal. If enacted it certainly helps card issuing banks, hurts retailers - especially small ones. Seems like it further drives us to say “credit” rather than “debit.” I can’t conceive how increased debit swipe fees affect PayPal except marginally good.

Joe
Long PayPal since the EBay spinoff and inclined to add

3

Great write-ups, Matt! Thank you.

I work at a school, with a small bookstore that runs off of Square’s point-of-sale system. According to our person who runs it, she has worked with PayPal’s point-of-sale before, and prefers it to Square (better reporting capabilities).

Also, our fund-raising department has been getting requests from young alums to be able to make donations through Venmo (a service that isn’t currently available from Venmo but my understanding is that it’s being beta-tested).

Advantage PayPal in my very limited and highly random and unscientific survey of that space.

5 Likes
4

Also, our fund-raising department has been getting requests from young alums to be able to make donations through Venmo (a service that isn’t currently available from Venmo but my understanding is that it’s being beta-tested).

To clarify, the point I was trying to make here (but didn’t state very well) is that Venmo has “buzz” around it. There is also potential significant profits in processing donations through mobile app with social networking attached, which Square will probably come out with a form of if they don’t have it already, but Venmo has “the buzz”.

5

Joe,

I gotta be honest yo caught me off guard with this one. I have to admit more ignorance than not. When I did some Googling this article came up from Bloomberg:

Six years ago, when President Obama signed the Dodd-Frank Act into law, America’s retailers got a big reduction in the debit-card fees they pay banks. Now, with Donald J. Trump set to take office, they’re preparing for a lobbying fight to defend that legislative victory – and the billions they’ve saved as a result.

Retail industry trade groups are rallying their base to try to beat back a part of the Financial Choice Act, a bill sponsored by House Financial Services Committee Chairman Jeb Hensarling that advanced in September after a 30-26 vote in an acrimonious panel markup. The measure takes a red pen to the core language of Dodd-Frank, including an amendment by Senator Richard Durbin, the Illinois Democrat. His measure capped interchange fees – the payments retailers make to banks that issue debit cards whenever a customer swipes.

Though Trump’s plan for banking regulation is still unclear, his administration is widely expected to adopt a version of Hensarling’s bill. And if a repeal of the Durbin Amendment survives in the final iteration, that would mean pain for a retail industry already ailing from declines in brick-and-mortar store traffic and a sales slowdown. Prices for consumers would almost certainly go up.

And then later in the article, PayPal and Square were both mentioned:

A repeal of his amendment could also have some trickle-down effects. Today, whenever a customer use a debit card through PayPal Holdings Inc. and Square Inc., these payment processors only pay larger banks involved in the transaction 20-some cents. But they charge merchants a flat percentage-of-transaction fee: 2.75 percent of a swiped card transaction in the case of Square. If the Durbin Amendment is eliminated, PayPal and Square could charge retailers more.

PayPal spokeswoman Amanda Christine Miller said it’s too premature to comment on the matter. Square declined to comment.

Read the whole thing at https://www.bloomberg.com/news/articles/2016-12-06/banks-ret…

So it could have some adverse effects on PayPal too. But I would be lying if I said I knew too much about it. SorrY!

Matt
Long PYPL
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

1 Like
6

Also, another one of my articles was published today on how Square is innovating in the payments space:

From its simple and innovative founding in 2009 as a way for businesses to accept card payments through mobile devices, Square Inc (NYSE:SQ) has evolved into a comprehensive payments solutions platform.

While the company is not yet profitable, most of Square’s metrics show consistent growth across its many platforms. In the company’s most recently reported quarter, Square’s adjusted revenue came in at $178 million, a 51% increase year over year. The company’s gross payment volume (GPV) was $13.2 billion, a 39% increase year over year.

This growth is more impressive given the highly competitive nature of the payments solution industry. After all, shortly after Square introduced its innovative mobile payment hardware, other major payment solutions companies followed with their own mobile card readers. If Square is to keep growing revenue at double-digit rates and ultimately turn a profit in its low margin, competitive industry, it must continue this culture of innovation.

Fortunately for Square investors, the company keeps designing ways to breathe new life into what has been, at times, a technologically stagnant industry. Here are three such examples…

Read the whole thing at http://www.fool.com/investing/2017/01/07/3-ways-square-inc-i…

Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

2 Likes
7

Thanks Matt for the great write ups on payment processing. I checked out Build with Square API when I read your writeup, and the first thing that came to my mind is this competes with Shopify.

What are your thoughts on Build with Square vs Shopify ? They both started off in different markets, but are now heading into each others territory.

I did some googling and found some online resources:

https://www.merchantmaverick.com/shopify-vs-square/
http://stylefactoryproductions.com/blog/shopify-vs-squarespa…
https://www.werockyourweb.com/clover-vs-square-vs-shopify-vs…

It does seem this is a very crowded space with everybody ending up competing with everyone by intruding in adjacent markets in their attempt to build a moat. I think Paypal and Shopify look safer, but square can surprise. I have a full position in Shopify and some small starter position in Square and Paypal and am thinking to increase my Paypal position.

3 Likes
8

Thanks Swapsan for the encouraging words.

Shopify is a company I am extremely interested in but I don’t feel I know enough about their business model and all their offerings to really compare the two. But, yes, it has occurred to me several times that there are definitely areas of competition between Shopify and PayPal/Square.

Sorry! Wish I knew more!

Matt
Long PYPL
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

1 Like
9

Swapsan,

Just FYI, your Style Factory link compares Shopify to Squarespace. This has caused me a lot of confusion too, but I am fairly certain Square doesn’t own and is not affiliated with Squarespace. Confusing, I know. I had to do lots of digging before I finally convinced my self that was the case!

The other links are great! Thanks for sharing. It’s always good to read reviews of services like this where I have no personal experience using either product. Thanks!

Matt
Long PYPL
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

2 Likes
10

I did some googling and found some online resources:

Those are great finds swapsan, especially the first two (although they may be a little dated as they don’t take into account Square’s loans, instant payments, and things like that).

I don’t see how PayPal fits as a competitor though. My contact with PayPal is as a customer who uses it as a credit card. Square is selling the POS’s and allows you to take the credit cards. You can use PayPal to pay for something on Square points of sale, for instance.

Best,

Saul

11

I don’t see how PayPal fits as a competitor though. My contact with PayPal is as a customer who uses it as a credit card. Square is selling the POS’s and allows you to take the credit cards. You can use PayPal to pay for something on Square points of sale, for instance.

Hey Saul,

PayPal’s Braintree is what competes with Square’s payment processing services. Square Cash more directly competes with with PayPal and Venmo. So, conversely, I’m almost positive you could also use Square Cash to pay for something on a Braintree POS.

For more on Braintree, see: https://www.braintreepayments.com/

For more on Square Cash, see: https://cash.me/

For a comparison of Square Cash vs. PayPal vs. Venmo vs. Google Wallet, see (note PayPal also owns Venmo): http://www.digitaltrends.com/mobile/paypal-vs-google-wallet-…

Hope this helps.

Another reason I like PayPal is that I think because far more consumers use PayPal and Venmo, this will help drive Braintree’s adoption with businesses. PayPal’s recent partnerships with Mastercard and Visa also allow Braintree to accept MasterPass and Visa Checkout too. I think because they control more of the other side of the equation (consumers), this might help them drive Braintree’s adoption. Just a thought.

Matt
Long GOOGL, PYPL
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx

4 Likes
12

Saul,

I don’t see how PayPal fits as a competitor though. My contact with PayPal is as a customer who uses it as a credit card. Square is selling the POS’s and allows you to take the credit cards. You can use PayPal to pay for something on Square points of sale, for instance.

That was my understanding, till I came across this last week. (My understanding is limited so I could be mistaken)

https://www.paypal.com/us/webapps/mpp/point-of-sale-systems

Another site which compares Paypal and Square:
https://www.merchantmaverick.com/square-vs-paypal/

It seems Square’s success has woken up Paypal and they are interested in same market payments + pos + adjacent financial services which includes analytics, capital etc.

Based on googling pretending as a customer for both, it looks Square at this point has a lead in customized solutions for each industry. I am not sure for how long as Paypal is not short of resources to compete. It will be interesting to see how it evolves.

2 Likes
13

The point of sale systems that they offer are more than just payment processing. They also track inventory, sales tax, payments through other means like cash and “on account”, etc. According to the person who runs the student store where I work, whose opinion I respect and has used both Square and PayPal, PayPal is superior based on reporting capabilities and customer service. But in googling on-line reviews, Square looks to often get the higher rating. I use our Square system to run some basic accounting reports, and it works just fine. I haven’t used PayPal.

It does concern me as a potential investor in Square to hear that they are branching into loans and human resources. That’s a lot of core competencies to mingle together, and maybe they will spread themselves too thin? Not to mention that payment processing, loans, and human resources are probably three of the most regulation-rich fields around–I feel for them trying to take on all three! Sounds like pure masochism. :slight_smile: To me, the buzz I’m hearing around Venmo has me thinking it’s going to become huge for PYPL. Plus, PYPL is turning a profit, SQ is not, and I largely avoid companies that aren’t profitable.

I use TA to fine-tune my entries. Ideally I’d like 40 or under as an initial entry for PYPL, but I wasn’t watching it and missed out on opportunities. Odds are pretty good that it will see 40 again, but I think the 41.45 it sits at now isn’t bad for an initial entry. I may take it, or something close. SQ has a ton of momentum at the moment, and may well be headed higher, but it would take a pretty good pullback to trigger an entry point for me.

4 Likes