Personal Finance

Better Buy: PayPal Holdings, Inc. vs. Mastercard

A person holding a credit card while typing on a computer

People around the world are expected to make 726 billion transactions using digital payment technologies by 2020, according to a recent study from Capgemini and bank BNP Paribas. With the world becoming more digital every day -- and with 85% of global transactions still being made in cash -- this massive market should only continue to grow larger in the decades ahead.

PayPal Holdings (NASDAQ: PYPL) and Mastercard (NYSE: MA) are two businesses particularly well positioned to profit from these trends. But which is the better buy today? Let's find out.

A person holding a credit card while typing on a computer

As more consumers shop online, digital payments companies are enjoying strong demand for their services. Image source: Getty Images.

Financial fortitude

Let's look at some key metrics to see how PayPal and Mastercard stack up in regard to financial strength.

Metric PayPal Mastercard
Revenue $12.3 billion $11.9 billion
Operating income $1.7 billion $6.5 billion
Net income $1.6 billion $4.6 billion
Operating cash flow $3.6 billion $4.7 billion
Free cash flow $3.0 billion $4.3 billion
Cash and investments $7.1 billion $7.4 billion
Debt N/A $5.4 billion

DATA SOURCES: MORNINGSTAR, company filings.

Mastercard and PayPal have similar revenue bases, but Mastercard is the far more profitable business. The credit card titan's operating and net margins check in at 54% and 39%, respectively, compared twith14% and 13% for PayPal. Still, while both Mastercard and PayPal have more $7 billion in cash and investments on their balance sheets, Mastercard has over $5 billion in debt while PayPal has none. So I'll give PayPal a slight edge in terms of financial strength.

Advantage: PayPal.

Growth

PayPal's revenue and operating profit growth has exceeded that of Mastercard in recent years.

PYPL Revenue (TTM) data by YCharts

Wall Street expects this trend to continue; PayPal is projected to grow its revenue by more than 18% in 2018, while Mastercard's sales growth is anticipated to come in at less than 13%. Moreover, analysts' forecasts have PayPal increasing its earnings per share at about 20% annually over the next five years, fueled by the growth of mobile commerce . Mastercard, meanwhile, is expected to grow its EPS by less than 18% annually during that same time.

With its recent past -- and, more importantly, expected future -- growth exceeding that of its larger rival, PayPal has the edge here.

Advantage: PayPal.

Valuation

No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for PayPal and Mastercard, including price-to-earnings (P/E) and price-to-earnings-to-growth ( PEG ) ratios.

Metric PayPal Mastercard
Trailing P/E 61.48 37.11
Forward P/E 34.82 29.45
PEG 2.06 1.91

DATA SOURCES: YAHOO! FINANCE, MORNINGSTAR.

On all three metrics, Mastercard's shares are less expensive than PayPal's. Though on a PEG basis, these two payment titans' valuations are closer than I expected.

Advantage: Mastercard.

The better buy is...

PayPal and Mastercard are both excellent ways to profit from the boom in digital payments. But with its superior financial strength and greater growth prospects, PayPal is the better buy today.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Mastercard and PayPal Holdings. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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