Square Vs Mastercard Stock: Which Is Best?

Square Inc (NYSE:SQ) is a rising star in the financial services market. The company’s suite of no-contact payment options like Square and Cash App became “du jour” during when traditional brick-and-mortar businesses turned to virtual checkouts.

It’s no surprise it caught the attention of both investors and established financial companies, like Mastercard Inc (NYSE:MA).

If you’re investing in the financial services industry, which is better between Square vs Mastercard stock?

Square nearly tripled in value during 2020 while Mastercard barely recovered to its former price level. Visa (V) and Mastercard (MA) face tough regulations in the European Union. And the world is quickly moving towards a mobile-first online experience. That doesn’t mean Square has an advantage over its legacy rival.

Mastercard runs one of the largest payment networks outside of China. It doesn’t issue credit cards nor debit cards – it simply co-brands them to enable partners to use their networks. The company’s held assets and technology development could keep it competitive for generations to come.

Of these two payment companies, which is the best buy for investors?

Is Square Stock A Buy?

Square and Cash App are well-known disruptors in the financial industry. The company founded by Twitter CEO Jack Dorsey saw a gap in traditional credit cards and saw smartphones as the answer. It offers a wide range of products from P2P payments to credit card scanning, point of sale systems, and e-commerce solutions.

The company even lets customers get Bitcoin back on their cash purchases.

Recently, Square’s market capitalization was over $100 billion, representing a P/E ratio over 500x.

That eye-popping price-to-earnings ratio was on the back of a huge rally following a crash in share prices to a 52-week low of $32.33.

It wasn’t long that they stayed muted before roaring back to a historic high of $241.85. It’s still hovering just below this valuation.

The FinTech company beat analyst estimates in the third quarter of 2020. It reported $794 million in gross profits off $3.03 billion in total net revenue. This is a 140 percent year-over-year growth and helped the company earn $37 million in net income after paying off its operating costs and other bills.

Its biggest increase is in its Cash App ecosystem, which includes the ability to buy stocks, direct deposit, get a Cash Card, and more. This turns the app into an all-in-one financial app competing with the likes of Visa (V), PayPal (PYPL), and Robinhood.

Still, some analysts prefer the proven revenue streams of Mastercard.

Mastercard Intrinsic Value: Is There Upside?

Applying a valuation analysis to Mastercard, the fair market price per share based on its intrinsic value is $360 per share. Prices below that level suggest there’s value yet to be accrued by investors.

Mastercard’s Q3 2020 earnings report showed net revenue of $3.83 billion and $1.60 billion in profits from it. This comes out to $1.60 earnings per share, which is a 25 percent decrease from the same quarter in 2019.

Cross-border payments especially suffered as global lockdowns and travel restrictions choked the industry. This forced Mastercard to focus on fintech acquisitions to remain competitive. It bought Finicity and IfOnly in the summer of 2020.

This shows the company’s dedication to expanding in the digital revolution.

Its business model depends on charging transactions fees for businesses accepting its payment cards. It spearheaded the changeover from magnetic stripe cards to chip cards. And it’s fighting to keep the oligopoly it enjoyed for decades with Visa (V), Discover, and American Express (AXP).

The difference between MC/Visa and the others is they don’t issue cards. They only manage the payment networks. This gives them less liability in case of nonpayment.

Has Square Share Price Run Too Far, Too Fast?

Square stock price has been trading at over seven times what it was at the low of the crash. It’s also three times its pre-pandemic high. This worries bearish investors who wonder if the company already experienced its highest market capitalization.

Its P/E ratio is ten times what Mastercard is trading for, and that’s already higher than the price of its rival, Visa. This puts a hefty premium on the financial technology company.

“Overpriced” tech stocks could deflate in a post-pandemic dotcom bubble burst. It’s a big worry for investors still licking their wounds from the most recent market crash. And there’s no telling when the economy will reopen or what it will look like when it does.

But it still may have an easier time than Mastercard.

Mastercard In The Crosshairs Of Regulators

Mastercard is in the crosshairs of the European Union, which introduced the European Payments Initiative (EPI).

It hopes to replace the E.U.’s dependance on American financial infrastructure and to keep transaction fee revenue within its borders.

The move follows the 2019 antitrust case in which Mastercard was fined nearly $700 million U.S. by the E.U. for monopolizing cross-border payments.

It’s now partnering with Google Pay to keep its presence in Europe. This could be a signal of things to come around the world, as cryptocurrencies and other digital payment projects make their way to the mainstream.

Mastercard’s existing payment structure long gave it an advantage with an expensive barrier to entry. Now companies like PayPal, Square, Google (GOOG), Apple (AAPL), and Facebook (FB) are all heavily focused on providing the same financial services. This middleman’s time may have come.

Mastercard Vs Square Stock: The Bottom Line

Mastercard is a long-standing American financial company that dominated global payments alongside rival Visa for years. Square has disrupted this traditional oligopoly using existing consumer devices to create its own digital payment platform with its rival PayPal.

Now each of these companies is facing a brave new world with an accelerated trend towards digitization and virtualization.

Contactless payments, ecommerce, and mobile payments are the wave of the future. The gauntlet was thrown on the field, and these tech titans are doing battle. Mastercard is clearly losing ground but has a lot of resources in hand. Don’t count it out yet.

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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.