Best financial stock: Mastercard or PayPal Holdings

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It’s been a crazy year for financial markets, but thanks in part to federal stimulus and relief funds sent to households, e-commerce and digital payments companies have more than held up. Pay Pal (NASDAQ: PYPL) is one of them, showing an acceleration in growth in the second quarter of 2020. On the other hand, MasterCard (NYSE: MA) and its global digital payment processing network has not performed as well, although its long-term outlook remains positive.

Full Disclosure: I own both stocks and believe PayPal and Mastercard will experience strong growth over the next decade. But one of them seems to be the far better stock buy right now.

E-commerce and digital wallets take over

PayPal’s Q2 2020 newsletter, covering the period from April to the end of June and encompassing the worst of the economic crisis, was excellent. Total Payment Volume (TPV) grew 29% year-over-year to $ 222 billion, leading to a 22% increase in revenue to $ 5.26 billion. As PayPal’s transaction volume grows, this results in even faster net returns. Operating profit rose 35% to $ 951 million, and earnings per share climbed 86%, thanks in large part to PayPal’s investment in the South American leader in e-commerce. Free market (NASDAQ: MELI).

Image source: Getty Images.

While the resurgent growth rate is sure to slow down eventually, PayPal believes the beneficial effects of the pandemic for e-commerce and digital payments still have room. With net new account additions increasing 21% in the second quarter (to a total of 346 million accounts at the end of June) and mobile payment and digital wallet subsidiary Venmo increasing its POS terminal by 52%, PayPal believes that income will increase at a rate similar to the second. quarter in the second half of 2020. The stock comes at a high price – over 42 times 12-month free cash flow – but it’s not an unreasonable amount if PayPal’s growth expectations turn out to be correct.

Beyond 2020, PayPal is already well positioned to take advantage of the gradual and continuous migration to digital commerce and banking services. Specifically, the company has rolled out in-store contactless QR code payments for small merchants and is also working on a system for large retailers (CVS Healththe pharmacy activity of is in an early testing phase of the service). A Venmo credit card will also debut later this year, and the creation of integrated banking services within Venmo and PayPal will be the focus going forward – from Honey’s acquisition’s online shopping tools. last year in credit card rewards management and budgeting tools.

At the end of June, PayPal had $ 16.2 billion in cash and investments and $ 9.0 billion in long-term debt. With momentum on its side and the firepower to continue acquiring new users here in the United States as well as overseas, there is a lot to like about this ecommerce and fund management company.

Global payment networks are down, but not down

The digital transactions network operator Mastercard – along with the other half of the global transaction network duopoly Visa (NYSE: V) – did not do as well during the spring months. The value of payments it processed fell 10% to $ 1.4 trillion in the second quarter, leading to a 19% and 31% drop in revenue and net income, respectively. While Mastercard’s payment services also encompass the burgeoning e-commerce industry, most transactions around the world are still done in person with a debit or credit card. So, with much of the world in some form of foreclosure, this war on money stock struggled.

But as the global economy recovers, Mastercard is sure to rally, too. Various expectations demand that the growth percentage of the global digital payment industry be at least teens every year through 2025, as more people around the world are giving up cash instead of menu. The near-term outlook is blurry at best, but increased reliance on digital transactions this year will ultimately work in Mastercard’s favor.

Along the way, the company has also invested in data security services and other financial technologies to complement its core business. I expect this investment activity to continue. Even in a lean season, Mastercard generates incredible profit margins, especially a net margin of 42% in the second quarter, with net profit totaling $ 1.4 billion on revenue of $ 3.3 billion. And in addition to using part of its cash generation to buy smaller, faster growing companies, Mastercard pays an annual dividend yield of 0.5% and also repurchases stocks (estimated to be worth more than $ 1.0 billion in July alone after the company put the buyout plan back in place.

With its long-term potential, Mastercard is also trading for a high premium – 44 times free cash flow, although 2020 will be a dud. But with $ 11.5 billion in cash and investments and $ 12.5 billion in debt, Mastercard is in good shape to eventually resume expansion.

What is the best buy?

Over the next decade, I think PayPal and Mastercard could knock on the door of the trillion dollar market cap club. So I own both and have no plans to sell either. But with both stocks trading at similar price-to-free cash flow ratios, PayPal’s higher growth rate, more concentrated exposure to e-commerce, higher net cash balance, and lower leverage mean that it seems to be the best buy right now.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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