A digital payment is the process of transferring funds through electronic devices such as smartphones, smartwatches, tabs, and others. In addition, it makes the traditional money transfer faster, easier, and more secure for the parties involved in the transaction.
The global digital payment market is estimated to advance at a CAGR of 10.9% over the next five years, hitting $15.55 trillion by 2027. The growing worldwide volume of cashless transactions is projected to be the key growth driver for the given industry. Besides, the current Fed's policy should be a solid tailwind for the overall financial industry.
Therefore, in today’s article, I will analyze and compare two digital payment stocks, PayPal Holdings, Inc. (PYPL) and Mastercard Incorporated (MA), to determine which one presents a better buying opportunity at the moment.
PYPL is one of the largest debit electronic payment systems that grant customers to pay bills and purchases, and send & receive money transfers. MA is a digital payment company that offers transaction processing and other payment-related products and services in the United States and worldwide.
Year-To-Date (YTD), shares of PYPL are down 60%, while MA stock has decreased 10% over the same period.
Recent Developments
On May 2nd, Aon and PayPal revealed their incentive to help PayPal's small business customers in the U.S. receive insurance easily and quickly. Under a unique digital insurance program, PayPal's small business customers in the U.S. will be able to shop for, purchase, and manage insurance coverage via Aon's CoverWallet solution on the PayPal Commerce Platform in a few clicks. Customers can also access personalized advice and guidance from Aon's licensed insurance advisors.
On April 29th, JPMorgan analyst Tien-tsin Huang boosted the price target on MasterCard from $400 to $430, remaining its Overweight rating unchanged. The analyst noted the company's strong first-quarter results, reflecting a substantial pickup in cross-border travel. In addition, Mastercard's price target was also raised at Citi and Deutsche Bank following the solid Q1 results.
Recent Quarterly Performance & Analysts’ Estimates
On April 27th, PayPal issued an earnings report for the first quarter of 2022. The company’s first-quarter top-line grew 7.8% year-over-year to $6.5 billion, mainly driven by a 7% YoY increase in transaction revenues to $6 billion, caused by growth in Braintree products and services. As a result, PYPL topped revenue estimates by $90 million. Its first-quarter Non-GAAP EPS has been reported at $0.88, standing in line with analysts' expectations.
In addition, the company’s total payment volume ("TPV") experienced a year-over-year improvement of 13% to $323 billion. At the same time, the number of active accounts grew 9% YoY to 429 million.
Currently, Wall Street projects PYPL's EPS to decrease 23.22% year-over-year in FQ2 to $0.88. Remarkably, analysts anticipate the company's current-quarter revenue at $6.80 billion, implying a 9.02% year-over-year growth.
For its fiscal first quarter ended March 31st, 2022, Mastercard's revenue rose 23.8% year-over-year to $5.2 billion, beating Wall Street's revenue consensus by $300 million. The increase in revenue was driven by a 17% YoY gross dollar volume growth to $1.9 trillion on a local currency basis. Besides, the company's cross-border volume and switched transactions grew by 53% and 22% compared to the year-ago quarter, respectively.
Also, Mastercard reported a Non-GAAP EPS of $2.76, beating Wall Street’s consensus by $0.60.
Mastercard's EPS is expected to grow 20.09% year-over-year to $2.34 in its fiscal second quarter of 2022. Analysts expect MA's revenue to increase 15.52% year-over-year to $5.23 billion in the current quarter.
Comparative Valuation & Profitability
Mastercard trades with a Forward P/E of 31.09x, which is higher than PYPL, whose multiple is presently 19.16x. However, both companies look overvalued compared to the sector's median of 17.29x.
In terms of the Forward EV/EBITDA multiple, MA's multiple of 24.27x is about 75% higher than PYPL's 13.84x. Both multiples are above the sector’s median of 11.92x.
However, Mastercard has a superb margin profile with a gross profit margin TTM of 100.00%, surpassing PYPL's gross profit margin of 45.38%. Its EBITDA margin of 59.36% and net income margin of 47.70% exceed the PYPL's respective figures of 18.93% and 13.87%.
The Bottom Line
I believe that MA is a better investment than PYPL at these levels. Although PYPL looks cheaper from a valuation standpoint, I think that Mastercard's premium is worth paying because of its superior financials, higher forward growth rates, and better profitability.
PYPL shares were trading at $76.99 per share on Friday morning, up $2.70 (+3.63%). Year-to-date, PYPL has declined -59.17%, versus a -16.14% rise in the benchmark S&P 500 index during the same period.
About the Author: Oleksandr Pylypenko
Oleksandr Pylypenko has more than 5 years of experience as an investment analyst and financial journalist. He has previously been a contributing writer for Seeking Alpha, Talks Market, and Market Realist.
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