PayPal Holdings Inc. (PYPL 2.47%) and Square Inc. (SQ +0.09%) are two of the leading digital payment processors in the world. But they've taken very different paths to their positions in the market.
Paypal came to prominence as the peer-to-peer payment processor for eBay. Square was built as a mobile payment processor for small businesses. Both have transformed themselves in the years since, becoming large providers of e-commerce and merchant solutions for businesses. They even compete in money transfers with Venmo and Square Cash.
But for investors, the question is which one should get your money today.
Image source: Square.
The case for Paypal
Of the two, Paypal is by far the more profitable, and also happens to be a lot bigger. It has a large roster of customers from its eBay days, and another set of users who have had accounts since its days as a pioneer of internet payments. That's what's driven the financial stats displayed below.
PYPL Revenue (TTM) data by YCharts
If you're building a small business, Paypal offers a serviceable solution for most e-commerce and in-person transactions, and integrates with QuickBooks, Salesforce, and point of sale solutions like TouchBistro and Vend Register. These are the tools that make running a business easier.
Square's mobile start makes a difference
While Paypal checks all of the boxes for e-commerce and mobile solutions, Square was built as a mobile company, and its solutions for those applications are better in many ways. Its payment hardware is more elegant, its point of sale software is easier to use, and the smoothness of its integration with business-essential systems is a key differentiator.
Its systems for managing payroll, email marketing, appointments, and loyalty programs are truly valuable, and those are just a few of the in-house products developed by Square. Its combination of offerings makes it easy for entrepreneurs to start anything from a food truck or salon to a brick-and-mortar retail store.
While Square is smaller than Paypal, it's growing much more quickly, largely because it's the platform of choice for new small businesses.
SQ Revenue (TTM) data by YCharts
You can see Square's disadvantage in the chart above. The company is still losing money, despite the financial improvements it has made over the past year. As it invests millions in building out its capacity to provide the services its small-business customers need to thrive, Square's bottom line may continue to suffer.
The best mobile payment stock
It's hard to argue that either Paypal or Square is a value based on traditional metrics. Paypal's market cap is a staggering $91.4 billion, or 61 times trailing earnings, and Square's market cap is $17.6 billion. What's interesting is that Square's price to sales ratio is 8.2 compared to 7.5 for Paypal, giving Square relatively little premium given its higher growth rate.
I think Square has a much brighter future, despite the losses it has reported recently. It's built to be a mobile and online payment company, and it's investing in the back-office capabilities that businesses need. And based on their price-to-sales ratios, Square seems more attractive than Paypal when you consider revenue growth and its strong market position.
Neither of these stocks is low-risk given their valuations, but my money is on Square to be the better stock in the long run.
