This article was originally published on Simply Wall Street News
PayPal Holdings, Inc. (NASDAQ: PYPL) Shareholders could be worried after seeing the share price drop 10% in the last quarter. But that doesn’t undermine the fantastic longer term performance (measured over five years). Indeed, the share price rose 540% during this period. Not only that, on an annual basis PayPal outperformed on a risk-adjusted basis by 22.4% (Jensen’s Alpha). Today we are going to take it one step further and examine how PayPal performs compared to its competitors.
In five years, PayPal Holdings has managed to increase its earnings per share by 30% per year. This EPS growth is lower than the 45% average annual increase in the share price. This suggests that market players hold the company in higher esteem.
This isn’t necessarily surprising given the track record of five-year earnings growth. This favorable sentiment is reflected in its (fairly optimistic) P / E ratio of 62.5x.
You can see below how the EPS has evolved over time (find out the exact values by clicking on the image).
It’s of course great to see how PayPal Holdings has increased its profits over the years, but the future is more important to shareholders. This free interactive report on PayPal Holdings balance sheet strength is a great place to start if you want to dig deeper into your stock research.
As we go beyond the stock, we need to define the major competitors and then compare them on a fundamental basis. This will give us an idea of the quality of the performance.
For our analysis, the first step is to define the competitors. This is almost always a subjective choice, and different services will choose different competitors. We will choose both large competitors and young, growing companies that are looking for a portion of the market share.
The competitors we are going to compare are:
Visa (NASDAQ: V) – Technology and payment processing
MasterCard (NYSE: MA) – Processing of transactions and payments
Square (NYSE: SQ) – Merchant payment processing, financial services
National Fidelity Information Services (NYSE: FIS) – Merchant solutions, integrated payment, e-commerce
Fiserv (NASDAQ: FISV) – Payment and financial services
SoFi Technologies (NASDAQ: SOFI) – Financial services, focus on loans
Paysafe (NYSE: PSFE) – Payment processing, financial services
In the selection process, it should be noted that the companies do not have exactly the same business model, but are strongly linked to the financial industry at the consumer and merchant level. They also derive a substantial portion of their income from some form of payment processing, financial services and banking alternatives.
First, we will add up the revenues of the last twelve months (ending in the most recent quarter) of listed companies, and calculate a total value of revenues for companies that are engaged in this industry. This would closely approximate total market share and, for our selections, equates to a revenue value of 109 billion US dollars.
In the image below, we will see the distribution of market shares of listed peers:
The chart above shows that PayPal and Visa are the two leaders in the financial transaction services market, with a market share of around 20%. Keep in mind that competitors are generally, but not precisely, comparable, and the analysis does not take into account private companies in the same arena such as Stripe.
Then we move on to growth and compare how much revenue has changed compared to the same twelve month period 1 year ago.
This gives us a good idea of which company has made the most progress.
We see that the two fastest growing companies in this space are both PayPal and Square. In fact, Square increased its revenue by 170%, and PayPal increased its revenue by 24%. It appears that PayPal is effectively capturing further growth in the industry, while Square is quickly reaching a leadership position.
Our final step will be to see how profitable these companies are, in order to analyze their ability to convert revenues into precursors of cash flow for shareholders. For this purpose, we will use EBIT margins, as they take into account a company’s trading expenses and make profits more comparable before taxes and extraordinary items.
In the last graph, we will compare the profit margins of the competitors:
The margins give an interesting overview. They show that PayPal has both healthy and growing margins. Square has achieved profitable EBIT margins, but is still in the early stages of profitability and will take some time to stabilize. FISV appears to be an interesting candidate to explore further, as it has also managed to increase the margin considerably.
On the other hand, the last 12 months have not been favorable for Mastercard and Visa, as both companies appear to be experiencing a slight drop in profitability. Their high margins also make them a prime target for new FinTech startups like SoFi and PaySafe, which could bring a cost-cutting innovation that takes market share away from big players.
At the end of the day, those who offer a better product to consumers end up winning in the long run. The FinTech industry has strong barriers to entry when it comes to technology infrastructure and legal compliance, but these too are diminishing as cloud services make development more accessible to smaller competitors.
By looking at the comparisons, we would dive deeper into PayPal and see the value of their stock price, at the same time we would look at FISV as a potential candidate and put SOFI and PSFE on a high risk watch list.
Key points to remember
The analysis focused on revenues and profitability. We have not reviewed the price of the shares or their balance sheet. Investors who wish to deepen their knowledge can explore these companies individually on our platform.
If you visit companies on SimpleWallSt, you’ll find that our valuation model reveals that Paypal trades around fair value, Square is overvalued, and Fiserv is undervalued, but investors should dig deeper into every business before making a decision.
As our analysis focused on PayPal, it found that the company has healthy growth and margins, and analysts estimate EPS stabilization by 2023, followed by a resurgence in earnings growth. Looking back, PayPal is outperforming its risk profile and has given investors a 45% average annual increase in the share price.
The FinTech industry has rediscovered growth and is currently undergoing a transformation. This can reduce service costs and reduce the profitability of large established companies like Visa and Mastercard.
Please note that the market returns quoted in this article reflect the market-weighted average returns of stocks currently traded on the US stock exchanges.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no positions in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents.