PayPal Holdings (NASDAQ: PYPL) appears to currently be a better pick compared to Mastercard (NYSE: MA). PayPal stock trades at about 13.7x trailing revenues, compared to around 21.1x for Mastercard. Does this gap in PayPal’s valuation make sense? We don’t think so. While Mastercard has suffered a 9% y-o-y drop in FY2020 driven by a decrease in the cross-border transaction volumes, PayPal’s top-line increased 21% y-o-y in the pandemic. That said, there is more to the comparison. Let’s step back to look at the fuller picture of the relative valuation of the two companies by looking at historical revenue growth as well as operating income and operating margin growth. Our dashboard PayPal Holdings vs. Mastercard has more details on this. Parts of the analysis are summarized below.
1. PayPal Holdings Revenue Growth Performance Is Better vs Mastercard
PayPal’s revenues increased 64% from $13.1 billion in 2017 to $21.5 billion in 2020. Further, it grew 24% over the last twelve-month period, despite the impact of the Covid-19 crisis. This could mainly be attributed to strong growth in total payments volume (TPV) and the number of payment transactions, both of which benefited from an increase in the number of active accounts. Our PayPal Holdings Revenues dashboard summarizes the segment-wise breakup of the company’s revenues. On the flip side, Mastercard’s Revenues grew just 22% from $12.5 billion in 2017 to $15.3 billion in 2020. Further, it has gained a meager 3% over the last twelve-month period, as the company suffered due to a decline in cross-border transaction volumes. Notably, some improvement in travel and events vertical due to easing of Covid-19 related restrictions and travel bans helped both the company’s top-line in the first and second quarter of 2021. Looking forward, given the fast-paced Covid-19 vaccination drive in the U.S. and improvement in the economic conditions, consumer demand is likely to further improve. This will likely benefit both companies.
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2. PayPal Holdings’ Performance Is Similar To Mastercard In Operating Margin
PayPal’s operating margins stood at 21.3% over the last twelve-month period, reflecting a 650 bps improvement from the levels of 14.8% in 2018. Similarly, MA’s operating margin of 55.1% over the last twelve-month period reflects a rise of 640 bps from the 48.7% figure seen in 2018. PayPal’s operating margin is much less than Mastercard. It is mainly due to transaction expenses incurred by PYPL, which is the cost associated with processing a transaction. It has declined over the recent years and was around 0.85% per transaction in 2020. It further decreased to 0.81% in Q2 2021, boosting the margin numbers. Meanwhile, Mastercard is the second-largest payments network in the world. It connects consumers, financial institutions, merchants, and other organizations worldwide, enabling them to use electronic forms of payment. The company’s operating margin has improved over the recent quarters due to lower general & administrative expenses as a % of net revenues. Therefore, both the companies have performed similarly on this front.
The Net of It All
Although Mastercard’s payments volume is much higher than PayPal’s, the latter charges a much higher percentage per transaction, hence the higher revenues. Further, PayPal’s revenues have grown at a much faster rate than Mastercard over the recent years. Looking at the post-Covid recovery, PYPL has fared better in the first half of 2021, with cumulative six months revenues rising at a healthy pace of 24% y-o-y, compared to 18% growth for MA revenues. Despite all these factors, PYPL’s stock is valued at a lower P/S multiple of 13.7x, compared to 21.1x for MA. Therefore, we believe this gap in valuation doesn’t make sense and PYPL currently appears as a better bet with higher past returns when compared to Mastercard.
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