The two payment companies are marketing apps that let
shoppers get discounts, make installments and buy cryptocurrencies. Both compete
in the digital wallet space with technology giants, including Apple (AAPL),
Alphabet's (GOOGL) Google and Amazon.com (AMZN), as well as feisty financial
technology startups.
But it's the head-to-head battle between PayPal and Square — and their respective fast-growing Venmo and Cash App services — that draws the most interest on Wall Street.
PayPal's Venmo and the Square Cash App started off as person-to-person money-transfer services for family members and friends. Now they've evolved into broad consumer financial services apps fueling growth for these leaders in the burgeoning field of digital payments.
The fate of the two companies' stocks depends in part on how
successful they are in winning over consumers with new features and services.
PayPal Stock, Square Stock Brace For The Race
The Square Cash App surged ahead first with new features,
such as enabling users to buy and sell cryptocurrency Bitcoin. During the
coronavirus crisis, Cash App has also emerged as a digital alternative to
traditional banks as users deposited government checks. As of Sept. 30, Cash
App customers had more than $1.8 billion in cash balances stored in their
accounts, up 180% from a year earlier.
Square also recently launched a Cash App-branded clothing
line. Cash App users can buy T-shirts, sweatshirts, hoodies and other apparel
at a 25% discount. With the clothing line, analysts say Square seems to be
testing its own closed-loop, e-commerce platform.
Looking ahead to mid-2021, though, PayPal could move ahead
of Square in the digital wallet race, lifting PayPal stock.
PayPal plans a revamp of the Venmo mobile app for smartphones
and the PayPal app. With its digital wallet redesign in 2021, PayPal plans to
add Bitcoin trading. Also, PayPal aims to integrate the services of Honey
Sciences, acquired for $4 billion in 2019. The Honey consumer shopping app, for
example, offers coupons and a rewards program.
"With the wallet re-design, PayPal will be more
full-service than Cash App," Lisa Ellis, analyst at MoffettNathanson, told
Investor's Business Daily.
Venmo's $900 Million Revenue Target In 2021
PayPal's popular online check-out button will still be a
core offering in the digital wallet. A recently launched buy-now, pay-later
service also will be part of the digital wallet.
With the feature, PayPal users have the option of paying 25%
of an item's cost upfront, then pay the rest in three installment payments. The
service puts PayPal into competition with fintech startups such as Klarna,
Affirm and After-Pay. But PayPal isn't charging the 28 million merchants on its
payment network to use the buy-now, pay-later feature.
At Deutsche Bank, PayPal stock analyst Bryan Keane is upbeat
on "new functionalities being added to (PayPal's) digital wallet such as
bill pay, direct deposit, check cashing, budgeting tools, as well as
cryptocurrencies." Also, he expects PayPal to offer high cash back rewards
from a new Venmo credit card.
"Ultimately, PayPal will be able to offer its customer
base special promotions/discounts, even promoting special '(PayPal)
days'," Keane said in a report to clients.
Venmo, with 65 million users as of Sept. 30, is expected to
generate $900 million in revenue in 2021 and reach profitability in 2022,
according to PayPal. It currently
garners most revenue from its "Instant Deposit" feature. It collects
a small fee when users transfer funds into a debit card or bank account.
But the redesigned digital wallet is expected to add new
revenue streams. If the 2021 digital wallet redesign goes well, it'll help
PayPal stock weather lost revenue from eBay (EBAY). EBay, PayPal's former
parent, is moving its online marketplace to another payment processor, Adyen.
Square Stock: Cash App Emerges As Growth Driver
Meanwhile, the Square Cash App had less than half the number
of Venmo users — 30 million as of June 30 — but it's a bigger money-maker than
Venmo.
The Cash App has emerged as Square's growth driver as small
businesses shut down amid the coronavirus pandemic.
"Although Cash App is somewhat younger vs. Venmo in its
journey, the ecosystem is able to generate meaningfully higher revenue and is
gross profit positive, driven by an active user base that is about half as
large," PayPal stock analyst Daniel Perlin of RBC Capital said in his note
to clients.
Excluding low-margin bitcoin transactions, the Cash App
generated $435 million in revenue in the September quarter revenue, up 174% from
a year earlier.
RBC Capital recently projected $3.3 billion in Square Cash
App revenue in 2022, excluding bitcoin transactions.
PayPal Stock On IBD Leaderboard
Cash App offers a debit card through a deal with Marqeta.
Also, Square has been testing a short-term borrowing feature
for Cash App users. Square offers loans of $20 to $200. Cash App users are
expected to pay pack the loans in four weeks, with interest.
PayPal stock has jumped roughly 120% in 2020 amid a boom in
e-commerce. PayPal stock belongs to the IBD Leaderboard, with a Relative
Strength Rating of 86 out of a possible 99.
Square stock has soared more than 275%.
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