That has not just been the case over last few weeks, though. While many investors likely remember Square stock running from sub-$10 in the second quarter of 2016 to $100 in the third quarter of 2018, SQ stock has been quietly underperforming since then, at least compared to its peer, PYPL.
Over the last one, three and six months, PayPal stock has performed better than SQ stock. In 2019 and over the last 12 months, the same holds true. It’s not until the two are pitted against each other on the multi-year timeline that SQ stock outperforms, thanks to its dominant run.
1-month 3M 6M YTD 1-Yr. 3-Yr. Square -6.2% -15% 1.8% 19.3% 20.5% 595% PayPal 2.2% 15.5% 38% 34% 39.3% 196.8%
So what now; which stock is better and should investors go with SQ stock or PYPL (or both) moving forward?
Growth and Valuation
The first things many investors evaluate when looking at stocks are growth and valuation. Square’s earnings are forecast to grow about 60% this year and about 50% next year. That easily outpaces PYPL at 23% and approximately 18%, respectively.
The same goes for revenue growth. Square’s sales are expected to jump 43.5% this year and 34.5% next year. Analysts, on average, “only” expect PayPal’s revenue to rise 16.5% and 17.5% in 2019 and 2020, respectively.
While growth favors SQ stock, the valuation of PayPal, unsurprisingly, is superior. PYPL stock trades at roughly 36 times this year’s average earnings estimates, while Square stock trades at 86 times the consensus 2019 EPS estimate. PayPal and SQ trade at 7.3 and about ten times this year’s consensus revenue expectations, respectively.
With higher growth rates come higher valuations. That is no surprise and explains why SQ stock has a higher valuation. For some investors, that is a turn-off, even though SQ is growing more quickly than its larger competitor. At the same time, others may find SQ’s growth attractive. That’s why we have to look at other metrics as well.
Cash Flow and Financials
Square’s free cash flow (FCF) is growing rapidly, with its trailing FCF more than doubling to $204 million over the last year. However, PYPL is churning out incredible FCF right now, generating trailing FCF of about $6 billion.
That leaves PYPL stock trading at about 22 times its FCF, while SQ stock is trading at 144 times its trailing FCF.
Turning to the balance sheet, PayPal also dominates. The company has $7.8 billion of cash and short-term investments, while its current assets total $34.9 billion versus its current liabilities of $28.6 billion. It has no debt, while its total assets of $46.2 billion are 50% above its total liabilities.
Square does not have a weak balance sheet. But unsurprisingly, given its meaningfully lower FCF, its balance sheet is not nearly as strong as that of PYPL. SQ has $1.08 billion of cash and short-term investments. Its current assets of $3.2 billion outweigh its $2.2 billion of current liabilities, while the company carries just over $1 billion of long-term debt. Its total assets of $4.4 billion are roughly 33% more than its roughly $3.3 billion of total liabilities.
The Bottom Line on SQ Stock and PayPal Stock
If I had to pick between Square stock and PayPal right now, PYPL would be my choice. The stock is in an uptrend, not a downtrend, and has the wind at its back. PYPL’s FCF is robust and continues to grow at a steady pace. While PYPL is growing more slowly than SQ, PayPal has a more attractive valuation and a better balance sheet. Further, PYPL’s overall user growth is impressive, led by its Venmo service.
Unless the price and valuation of SQ stock drop sharply, I would recommend buying PYPL stock on a moderate pullback and staying away from Square stock. If SQ does drop sharply , it may be worthwhile to own both names.
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