Financial technology underwent a change over the past 20 years from traditional bank accounts to online payments. Visa Inc (NYSE:V) represents the old guard.
This legacy financial giant was the leading electronic funds transfer company before the Internet came into the picture at the turn of the millennium.
Paypal Holdings Inc (NASDAQ:PYPL), which was bought and subsequently spun off by eBay to become a major financial player, disrupted it.
Everyone’s looking for a safe place to store their money heading into the 2020s. The coronavirus pandemic clarified that no investment is safe, as both the Dow Jones and S&P 500 took historic hits. Let’s analyze PayPal vs Visa stock to determine with one is the best investment to survive the impending economic recession.
Is PayPal Stock A Buy?
PayPal’s 2002 IPO share price was $13, and it rolled into eBay Inc (NASDAQ:EBAY) six months later at a 1:0.39 ratio. However, eBay soon underwent two 2:1 splits before converting back to PayPal stock, which makes each original PayPal share worth 1.56 of the current stock, which was valued at approximately $33.
PYPL was already trading over $100 heading into 2020, and it quickly rebounded after the March 2020 crash to trade near $200 per share.
This puts its market cap comfortably over $200 billion in the second half of the year. The company has net revenues of $9.879 billion in the first half of 2020, which puts it at $19.218 in the trailing 12-month period.
This means the company is trading at approximately a 10x multiplier for its profits, although it’s expected to continue growing as it expands its in-store offerings in an attempt to reach one billion daily users.
Still, PayPal’s strong presence in both brick-and-mortar and online payments makes it a venerable industry force. Its 2013 acquisition of Venmo opened even more revenue opportunities, as the app serves over 40 million users.
As virtual work and online payments become more commonplace, it’s going to see increased revenues. The biggest question that’s been on everyone’s mind since it rose to prominence is when will PayPal ever work with Amazon.com Inc. (NASDAQ:AMZN)?
Should You Invest In Visa?
There are an estimated 1.20 billion credit cards in the U.S., and Visa’s 358 million make it the market leader over American Express, MasterCard, and Discover.
This is on top of the 641 million Visa debit cards in the U.S. and 1.69 billion worldwide, along with its massive payment network.
It’s so prominent that Visa’s transactions per second (TPS) rate has been consistently used in cryptocurrency to illustrate the comparative processing speeds of their blockchain-based digital ledgers.
Visa got hit hard by the impact of the coronavirus though, especially in travel spending. Both revenue and income are taking a hit in 2020 compared to 2019.
The company recovered from the initial coronavirus impact, but it’s still trading under $200 per share heading into October 2020, not much higher than it was in 2019 and giving over $400 billion in market cap. This is off $22.882 billion in revenue generated in the trailing 12-month period.
This gives Visa a nearly 20x multiplier over earnings, which is almost double that of PayPal. People are still spending money, but the shift to online payments also negates much of the liability shift implemented with EMV microchipped cards.
This is because online transactions are still card-not-present (CNP) transactions, and JPMorgan analysts even suggest ecommerce fraud is growing since the implementation.
Risks Of Buying PayPal Stock
PayPal grew its revenue streams much faster than Visa and it has a larger potential upside at this point. However, the digital payment giant doesn’t have an open road ahead.
It is investing heavily into expansion, which means it has a potential risk exposure should consumer spending drop drastically once government stimulus payments run out at the end of 2020.
There’s also the looming threat from cryptocurrency. PayPal and Venmo were slow to adopt Bitcoin and other cryptocurrencies to the platforms.
This opened the gate for blockchain-based competitors with mobile wallets, like Coinbase, Coinomi, Circle Pay, BitPay, and Electroneum (ETN) to take hold. Over 5,500 cryptocurrencies exist at this point, with Bitcoin (BTC) alone sitting at a market cap of over $100 billion.
And there’s also the legacy competition.
Dangers of Buying Visa
The European Commission’s European payments initiative (EPI) poses a threat to Visa’s bottom line by attempting to localize European payments and remove dependence on American financial infrastructure.
It’s also facing competition from blockchain-based competition that wants to upend its backend payment systems and create their own revenues.
Contactless and mobile payments are quickly gaining steam, and Visa is facing much more fierce competition in those arenas. While it fights for survival in the E.U., PayPal seems to have nowhere to go but up.
Visa Vs PayPal Stock: The Bottom Line
Because Visa has a 20x multiplier on its stock and isn’t generating much more revenue, it appears PayPal has the most growth potential and is poised to be the better financial stock trading at a 10x multiplier.
They both have similar revenue in the range of $20 billion per year, but Visa got hit harder by covid-19 lockdowns and is facing some rockier waters in maintaining its European business.
PayPal is the payment technology of the future, and while it may never completely knock Visa out, it’s poised to take over the throne with a larger market cap as its business expands in the post-coronavirus 2020s.
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.