Better Buy: PayPal or Visa?

Credit card giant Visa (NYSE: V) is no longer a simple payments network. It has emerged as a huge influence in financial technology, or fintech. Fintech itself has emerged as an important trend in technology, and the pandemic has accelerated its widespread usage. As the original digital payments company, PayPal Holdings (NASDAQ: PYPL) holds the leading edge in fintech capabilities, but it’s nowhere near as large as Visa. Which of these fintech powerhouses is the better buy today?

Visa: The global payments powerhouse

Visa is the largest payment processing network in the world. It facilitated more than $13 trillion in 230 billion transactions in 2021 and works through more than 100 million merchants worldwide. It powers 3.8 billion cards.

Because Visa has such a wide reach, its performance usually follows that of the economy. When there are dips and spending pullbacks, investors will see that mirrored in Visa’s operating results. At the beginning of the pandemic, there were double-digit revenue declines. However, shoppers always need the basics, giving Visa some kind of resilience even during tough times. It bounced back quickly and has been posting strong rebound numbers.

In the 2022 third quarter (ended June 30), revenue increased 19% year over year to $7.3 billion, and net income rose 32% to $3.4 billion. What should jump out at you right away is how high its margins are — that’s a 53% profit margin. Visa is asset-light, providing a network for payment processing, giving it less exposure to the increased costs and supply chain problems of the merchants it works with.

It also doesn’t carry loans, like a bank, but rather works with card-issuing banks, so it doesn’t have the same exposure to credit risk that the banks have when it provides the funds for credit cards. Those are attractive features for an investment.

Visa’s powerful network draws many businesses as partners, and it has invested in technology to offer up-to-date features for credit card users, merchants, and small business clients. For example, it recently partnered with Fundbox, a small business funding platform, to improve its digital capabilities. It also recently strengthened its partnership with PayPal to offer better digital payment options for cardholders, and it often acquires businesses that offer new technology that helps its business grow.

Visa also pays a dividend. While it’s not high-yielding, at 0.71%, its growth has far outpaced other classic, high-yielding dividend stocks such as Coca-Cola, Procter & Gamble, and Johnson & Johnson.

V Dividend data by YCharts

PayPal: The digital payments revolutionary

PayPal isn’t nearly as large as Visa, but it’s the biggest digital payments company, with nearly 430 million active accounts and $1.25 trillion in payment volume in the past 12 months. Since its revenue is highly correlated with online shopping, it experienced a major surge last year, posting some of its highest-ever growth.

Growth is slowing as it faces tough comps to beat from last year. Investors were disappointed in the company’s first-quarter results despite a slight revenue and earnings per share beat. Management spoke about spending pressure related to inflation and cut its full-year revenue forecast from 15% to 17% year over year, to 11% to 13%.

Double-digit growth is nothing to sneeze at, though, and PayPal is making strategic moves to keep its lead in digital payments and grow its business. Like Visa, it acquires businesses that align with its goals, such as its purchase of peer-to-peer payments app Venmo that solidified its lead in that area. The deal with Visa allows it to process greater payment volume, and it also recently rolled out a “pay monthly” option to facilitate more spending on its platform.

Aside from revenue increases, there are other strong indications of a company that’s still in growth mode. PayPal added 2.4 million net new active accounts in the first quarter and is expecting 10 million for the year. That’s a lot of new people transacting on the platform. It processed $323 million in payment volume, a 13% year-over-year increase, and it’s expecting 13% to 15% for the full year.

PayPal stock has fallen more than 50% this year as investors avoid tech stocks and take the flight to safety for the likes of Visa. PayPal stock, which has always sported a fairly expensive valuation, is now cheaper than Visa stock.

V PE Ratio data by YCharts

Which one is the better buy? It comes down to what your goals are. Visa is an excellent choice for a safe stock in your portfolio. At this valuation, PayPal is looking like a value stock, but it still offers a greater chance for gains.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends PayPal Holdings and Visa. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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