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    Monday, December 21, 2020

    PayPal Stock Outlook: Digital Wallet Battle Against Square Heat Up

    Electronic payment players PayPal Holdings (PYPL) and rival Square (SQ) are clashing in a critical race to improve digital wallet apps. It's a contest that could have a profound effect on both PayPal stock and Square stock for 2021 and beyond.

    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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