PayPal Stock Vs Mastercard: Which Is Best?

PayPal Stock Vs Mastercard: Cash payments have been on the decline for decades, as commercial banks and fintech entrepreneurs have worked to make spending money easier.

First, financial institutions transformed ATM cards through partnerships with Visa (V) and Mastercard (MA). They created debit cards that offered the same point-of-sale convenience as credit cards, without the need to qualify for and use credit accounts. Each debit card purchase was immediately deducted from the connected checking account. 

Consumers embraced debit cards for use at traditional brick-and-mortar stores, but the rise of e-commerce presented a new challenge. Individuals without traditional bank accounts and those with security concerns couldn’t participate in the growing e-commerce marketplace. When they did, it was a matter of mailing checks and money orders to online merchants, then waiting for weeks to complete the transaction.

PayPal founders spotted a huge opportunity to create direct connections between consumers and digital merchants.

With so much success behind them, will Paypal now start eating Mastercard and Visa’s lunch?

Paypal 101

When Paypal was founded, it was originally named Confinity, in December 1998, and they launched the first email-based payment technology in October 1999.

By March of 2000, Confinity had one million customers. In June 2001, the PayPal name was introduced, and the company held its IPO in February 2002. 

Were the big names in cashless payments, e.g. Visa and Mastercard, concerned about industry disruption from PayPal? Not really – not then.

However, the decades that followed made very clear that PayPal-style digital payments had potential to pull market share from Mastercard. That made it critical for Mastercard to build partnerships and explore innovative technological solutions of its own to compete. 

Today, both PayPal and Mastercard are well-established leaders in the payment processing industry. Both remain relevant, and both are expected to continue their success long-term.

For investors, the question is, in a head-to-head matchup, Paypal vs Mastercard stock: which is best?

Is PayPal Stock A Buy?

There is a stark difference between generations when it comes to the use of cash versus cashless alternatives. While 33 percent of those age 65 and older list cash as their preferred payment method, that figure drops to 20 percent in the 35 – 44 age bracket and 18 percent among 25 – 34-year-olds.

Those figures don’t account for the impact of COVID-19, which has dramatically accelerated the use of cash-free payments. Given concerns around the spread of the novel coronavirus, many businesses have encouraged the use of cash alternatives, and some have banned cash outright. 

According to research from the digital payment platform Square, just 8 percent of US sellers were entirely cashless in late February 2020.

That figure rose to 31 percent by late April, when non-essential businesses cut off in-person contact with consumers. As those businesses began reopening in June, the percentage of cashless sellers leveled off around 20 percent. 

PayPal benefitted from the move away from brick-and-mortar shopping.

As consumers turned to online options for everything from groceries to games, PayPal was there to facilitate payments. That gave the company a huge boost in its financial results for the first half of 2020.

Though analysts were already impressed with the opportunity presented by PayPal, it was the strong 2020 earnings reports that really caught investors’ attention.  

Specifically, for second quarter 2020, which encompassed the worst economic period of the pandemic to date, PayPal grew total payment volume by 29 percent year-over-year to $222 billion, driven by a 21 percent uptick in net new accounts.

As of the quarter’s close, PayPal boasted an astonishing 346 million accounts. That meant an increase in revenue of 22 percent, for a total of $5.26 billion, which translated into a 35 percent increase in operating income.

Ultimately, earnings per share went up by 86 percent, which exceeded even the most optimistic projections. 

Meanwhile, subsidiary Venmo is gaining traction. It increased total payment volume by 52 percent in the second quarter, and that’s probably just the beginning. Venmo offers a social media component to digital payments between individual users that is proving increasingly appealing. 

While all of these numbers give investors reason to buy, the biggest news during the earnings call wasn’t second quarter results. Investors and analysts were most enthusiastic about PayPal’s guidance that these results will continue through the third and fourth quarters of 2020.

After that, things will likely slow a bit, but there is still lots of room for growth as e-commerce continues to expand. If these predictions are correct, PayPal is well worth buying, despite the fact that shares are rather pricey. 

Should You Invest in Mastercard?

Mastercard and Visa pioneered credit and debit cards, and they have dominated both markets for decades.

In January 2020, Mastercard controlled 30 percent of market share, second only to Visa at 60 percent. The third place contender, American Express, trailed behind at just 8.5 percent. 

As of August 2020, Mastercard ranked #19 on the list of world’s largest companies by market cap. When just US companies are considered, Mastercard is #11. That’s only one place behind Walmart and well ahead of big names like Coca Cola and Disney

Mastercard had a strong 2019, thanks to its critical role in e-commerce. It did lose some momentum in 2020 due to the pandemic, as a large portion of its revenues come from merchant services for brick-and-mortar retailers. However, that dip notwithstanding, analysts agree that Mastercard will continue to grow.

In fact, some analysts project Mastercard is on-track to cross the $1 trillion market cap threshold as early as 2023.

Among other factors, there is opportunity to capture additional market share, particularly as it pertains to e-commerce.

Mastercard’s second quarter results reflected pandemic-related challenges, with the value of payments processed dropping 10 percent to a total of $1.4 trillion. That led to a 19 percent decrease in revenue, and a 31 percent decline in net income.

With that said, these lower numbers aren’t especially troubling when regarded from the perspective of profit margins.

For the second quarter, Mastercard saw a net margin of 42 percent and net income of $1.4 billion. That meant that despite the dip in revenue, it was able to pay shareholders a 0.5 percent annual dividend yield. 

Analysts are confident that 2020 is something of an anomaly for Mastercard, and there is no real concern that these results are the start of a trend. Globally, the digital payment industry is expected to grow by double digits over the next five years, and Mastercard will play an important role in facilitating the transition. 

Meanwhile, Mastercard is branching out a bit by exploring other fintech services. Among other things, it is looking at opportunities in data security, which is a logical extension for any company leading the way in digital payments. 

All things considered, the consensus is that Mastercard’s less-than-perfect 2020 is no indication of long-term results. Most agree that Mastercard is a stock to buy and hold indefinitely, despite its high price tag. 

Risks of PayPal Stock

PayPal has had an exceptional 2020, and most expect strong growth for the foreseeable future. However, that isn’t to say that investing in PayPal (PYPL) is completely without risk.

There is some concern that the company is a bit overvalued, which could present problems for short-term investors. 

Aside from that issue, the biggest challenge PayPal faces is competition for market share. While PayPal has been successful in leading in its respective space, a number of smaller, more agile companies are working to gain a foothold.

Among other challenges, such companies may develop higher-quality technology and more user-friendly interfaces that persuade users to switch services. 

Dangers of Buying Mastercard

Mastercard is widely expected to remain an industry leader in digital payment solutions. Thanks to its 50+ year history, it has data and infrastructure in place that only Visa can top.

The long-term outlook for Mastercard is excellent, and most investors are happy to wait out the difficulties of 2020. If there is any danger in buying Mastercard shares, it is generally considered to be short-term. 

Additional COVID-related economic disruption will negatively impact Mastercard. That means, for now, the biggest risk Mastercard shareholders face is a temporary drop in stock value.

This could be problematic for short-term investors, though it is unlikely to affect those with longer-term goals. 

Mastercard vs. PayPal Stock: The Bottom Line

Mastercard and PayPal are both strong choices for any portfolio, and both are expected to deliver solid returns in coming years.

However, with that said, in a head-to-head matchup, PayPal has a bit of an advantage for the moment. It’s currently growing faster, in part because of its deep relationship with e-commerce, and it has less short-term risk if new COVID-19 developments create additional economic disruption.

Furthermore, PayPal has more cash and less debt than Mastercard, which makes it an appealing first choice. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.