Better Buy: Visa vs. Block

Even though data security breaches and increasing cyberattacks remain a concern for the digital payment processing industry, the surge in digital financial transactions makes its prospects bright. In addition, the Federal Reserve is expected to raise rates by 50 basis points and get even tougher with interest rate hikes to drive down inflation, which should help the overall financial services sector, which includes the payment processing companies, expand their profit margins. According to the latest report by Reports and Data, the digital payments industry’s revenue is expected to grow at a CAGR of 13.6% by 2028. Therefore, both  Visa Inc. (V) and Block, Inc. (SQ) should benefit.

V is a payments technology company that facilitates digital payments among consumers, merchants, financial institutions, businesses, strategic partners, and government entities. It operates VisaNet, a transaction processing network. SQ creates tools that enable sellers to accept card payments and provides reporting and analytics and next-day settlement. It includes hardware products, including Magstripe reader, Contactless and chip reader, and Square Stand.

V is down 3.76% year-to-date, while SQ has plunged 36.6%. Which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On March 10, 2022, V announced it had acquired Tink. Charlotte Hogg, CEO of Visa Europe, said, "Digital tools are driving the new economy, and the combination of Visa and Tink will support greater choice and quality of digital money services as the lines between commerce, financial services and payments continue to converge."

On April 11, 2022, SQ unveiled the next generation of Square Stand, the company’s iconic countertop device that turns an iPad into a powerful, robust point of sale system that sellers can use to run their entire business. This should lead to increasing demand for its product.

Recent Financial Results

V’s net revenue increased 24% year-over-year to $7.10 billion for the fiscal first quarter ended December 31, 2021. The company’s non-GAAP net income grew 25% year-over-year to $3.90 billion. Also, its non-GAAP EPS came in at $1.81, up 27% year-over-year.

SQ’s net revenue increased 29.1% year-over-year to $4.08 billion for the fiscal fourth quarter ended December 31, 2021. However, its net loss came in at $80.98 million compared to an income of $293.96 million in the prior-year quarter. Also, its loss per share came in at $0.17 compared to an EPS of $0.59 in the year-ago period.

Past and Expected Financial Performance

V’s revenue and EBITDA grew at CAGRs of 7.5% and 9.2%, respectively, over the past three years. Analysts expect V’s revenue to increase 19% in fiscal 2022 and 12.9% in fiscal 2023. The company’s EPS is expected to grow 21% in fiscal 2022 and 17.2% in fiscal 2023. Moreover, its EPS is expected to grow at a rate of 18.1% per annum over the next five years.

On the other hand, SQ’s revenue and EPS grew at CAGRs of 75% and 189.5%, respectively, over the past three years. The company’s revenue is expected to increase 6.4% in fiscal 2022 and 21.3% in fiscal 2023. Its EPS is expected to decline 26.9% in fiscal 2022 but grow 68.8% in fiscal 2023. SQ’s EPS is expected to grow at a rate of 36.1% per annum over the next five years.

Profitability

V’s trailing-12-month revenue is 1.53 times what SQ generates. V is also more profitable with a gross profit margin and net income margin of 97.19% and 51.10% compared to SQ’s 25.03% and 0.94%, respectively.

Furthermore, V’s ROE, ROA, and ROTC of 37.36%, 14.05%, and 19.67% compared with SQ’s 5.30%, 1.22%, and 1.93%, respectively.

Valuation

In terms of forward EV/EBITDA, SQ is currently trading at 69.48x, 206.3% higher than V’s 22.68x. Moreover, SQ’s forward non-GAAP P/E ratio of 90.34x is 205% higher than V’s 29.62x.

So, V is the more affordable stock.

POWR Ratings

V has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. On the other hand, SQ has an overall rating of D, which translates to Sell. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

V has a grade of B for Quality. This is justified given its trailing-12-month net income margin of 51.10%, 814.3% higher than the industry average of 5.59%. On the other hand, SQ has a Quality grade of D, consistent with its 0.94% trailing-12-month net income margin, 83.2% lower than the industry average of 5.59%.

Of the 50 stocks in the Consumer Financial Services industry, V is ranked #7. However, SQ is ranked #95 out of 108 stocks in the Financial Services (Enterprise) industry.

Beyond what I’ve stated above, we have also rated the stocks for Sentiment, Stability, Momentum, Value, and Growth. Click here to view all the V ratings. Also, get all the SQ ratings here.

The Winner

The digital payment processing industry is well-positioned to benefit from the rapidly growing e-commerce sector and increasing internet penetration. The rising interest rate environment should also help the industry. While both V and SQ are expected to gain, it could be better to bet on V now because of its lower valuation, robust financials, higher profitability, and better growth prospects.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Consumer Financial Services industry here. Also, click here to access all the top-rated stocks in the Financial Services (Enterprise) industry.

V shares were trading at $213.93 per share on Wednesday afternoon, up $5.37 (+2.57%). Year-to-date, V has declined -1.12%, versus a -9.55% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

More...