PayPal (PYPL) vs. Enova International (ENVA): Which Financial Stock Is the Better Value Buy?

In this article, I evaluated two financial services stocks, PayPal Holdings, Inc. (PYPL) and Enova International, Inc. (ENVA), to determine which has the potential for better returns. We believe ENVA is the better buy for Value for reasons explained throughout this piece.

Financial organizations provide several consumer financial services, including current and savings accounts, online payment options, credit and debit cards, mortgage and commercial loans, insurance, and investment management. Solid consumer spending and business investment activity drive demand for these financial services.

As per a report by BlueWeave Consulting, the global consumer finance market size is expected to grow at a CAGR of 7.1%, reaching a value of $1.96 trillion by 2029. The quick clearance of loan requests from government and private banks or financial institutions and the easy accessibility of several loans like vehicle, house, or personal loans should boost the market’s growth.

Expanding access to credits and loans through digital payment systems is also expected to provide the consumer financial services market with abundant development prospects.

Moreover, the COVID-19 pandemic has boosted the global surge in the use of digital payments, creating high-growth opportunities for financial companies. The digital payments market size in terms of transaction value was valued at $8.40 trillion in 2022 and is projected to register a CAGR of 16.5% between 2023 and 2032.

The digital payments market growth is driven by various factors, including the increasing adoption of mobile devices, providing a larger user base for digital payment platforms, convenience and accessibility, enhanced security measures, and favorable government initiatives.

Also, emerging digital technologies are transforming every aspect of the financial industry landscape. With most financial services companies transitioning to the cloud, Artificial Intelligence (AI) and Machine Learning (ML) are widely adopted with applications including task automation, predictive analytics, fraud detection, credit risk management, customer support, and algorithmic trading.

Moreover, financial institutions generally benefit from rising interest rates as their profit margins expand as rates climb. In July, the Federal Reserve approved a 25 basis points (bps) hike, raising the benchmark fed funds rate target range to 5.25% - 5.5%, the highest level in nearly 22 years.

While the Fed held interest rates steady at its meeting in September, it signaled one more rate hike before the end of the year as the inflation rate is still above its target of 2%.

Given the industry’s bright prospects, financial services providers PYPL and ENVA are expected to benefit significantly.

ENVA is a clear winner in six-month price performance, with 15.1% returns compared to PYPL’s 21.8% decline. ENVA has surged 30.1% over the past nine months, while PYPL plunged 16.1%. In addition, ENVA’s 71.8% gain over the past year compared to PYPL’s decline of 33.1%.

Here are the reasons why we think ENVA could perform better in the near term:

Latest Developments

On August 7, PYPL launched a U.S. dollar-denominated stablecoin, PayPal USD (PYUSD). PayPal USD is designed to contribute to the opportunity stablecoins provide for payments and is 100% backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents. It can be redeemed 1:1 for U.S. dollars.

“Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD,” said Dan Schulman, PYPL’s president and CEO.

On September 26, ENVA announced consent solicitation for its outstanding 8.5% senior notes due 2025.

Given the strength of its balance sheet, its consistently solid financial performance since the notes were initially issued, and a significant improvement in its financial risk profile, the company is requesting additional flexibility from the holders of the notes to increase its ability to make restricted payments in connection with share repurchases and for other corporate purposes.

Recent Financial Results

PYPL’s net revenues increased 7.1% year-over-year to $7.29 billion for the second quarter that ended June 30, 2023. Its non-GAAP operating income grew 19.8% year-over-year to $1.56 billion. The company’s non-GAAP net income stood at $1.29 billion or $1.16 per share, compared to $1.08 billion or $0.93 per share in the same quarter of 2022.

However, PYPL’s adjusted free cash flow was $869 million, down 19.2% year-over-year. As of June 30, 2023, the company’s cash and cash equivalents have reduced to $5.50 billion, compared to $7.78 billion as of December 31, 2022.

During the second quarter that ended June 30, 2023, ENVA’s revenue increased 22.4% year-over-year to $499.43 million. The company’s income from operations rose 24.7% from the year-ago value to $111.60 million. Its adjusted EBITDA grew 23.7% from the prior year’s quarter to $126.46 million.

Furthermore, the company’s adjusted earnings came in at $55.27 million and $1.72 per share, compared to $54.92 million and $1.64 per share in the previous year’s period, respectively. As of June 30, 2023, its total assets amounted to $3.91 billion, compared to $3.25 billion as of June 30. 2022.

Past And Expected Financial Performance

PYPL’s revenue and EBITDA have grown at CAGRs of 14.1% and 14.4% over the past three years, respectively, while its net income has increased at a CAGR of 16.4%. In addition, the company’s EPS has grown at a CAGR of 18.1% over the same period. However, its levered free cash flow has declined at a 6.2% CAGR over the same time frame.

Analysts expect PYPL’s revenue and EPS for the fiscal year (ending December 2023) to increase 8.2% and 19.8% year-over-year to $29.77 billion and $4.95, respectively. Also, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 8.8% and 14.5% from the previous year to $32.38 billion and $5.66, respectively.

Over the past three years, ENVA’s revenue and net income have grown at 6.8% and 88.7% CAGRs, respectively. The company’s EPS has increased at a CAGR of 89.5% over the same time frame, while its total assets have grown at a 35.3% CAGR.

For the current fiscal year (ending December 2023), ENVA’s revenue and EPS are expected to grow 19.6% and 11.5% from the prior year to $2.08 billion and $7.59, respectively. Furthermore, analysts expect the company’s revenue and EPS for the fiscal year 2024 to increase 14% and 18.5% year-over-year to $2.37 billion and $9, respectively.

Valuation

In terms of trailing-12-month non-GAAP P/E, ENVA is currently trading at 6.80x, 46.3% lower than PYPL, which is trading at 12.67x. ENVA’s trailing-12-month Price/Sales multiple of 1.48 is lower than PYPL’s 2.34. Also, ENVA’s trailing-12-month Price to Book and Price/Cash Flow of 1.18x and 1.35x compared to PYPL’s 3.30x and 14.99x, respectively.

Thus, ENVA is relatively more affordable.

Profitability

PYPL’s trailing-12-month revenue is 28.3 times what ENVA generates. However, ENVA is more profitable, with a trailing-12-month gross profit margin of 81.54% compared to PYPL’s 41.30%. Additionally, ENVA’s trailing-12-month net income margin of 19.92% is higher than PYPL’s 14.27%.

In addition, ENVA’s trailing-12-month Return on Assets (ROA) of 8.59% is favorably higher than PYPL’s 4.97%.

POWR Ratings

PYPL has an overall rating of C, which equates to a Neutral in our proprietary POWR Ratings system. Conversely, ENVA has an overall rating of B, which translates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PYPL has a grade of C for Value, in sync with its mixed valuation. In terms of forward EV/Sales, the stock is trading at 2.16x, 25.5% lower than the 2.90x industry average. However, its forward non-GAAP P/E multiple of 11.91 is 36.1% higher than the industry average of 8.75.

On the contrary, ENVA has a B grade for Value, consistent with its lower-than-industry valuation. The stock’s forward Price/Sales and non-GAAP P/E of 0.71x and 6.28x are favorably lower than the respective industry averages of 2.20x and 8.75x.

Of the 50 stocks in the Consumer Financial Services industry, PYPL is ranked #19, while ENVA is ranked #9.

Beyond what we’ve stated above, we have also rated both stocks for Sentiment, Growth, Momentum, Stability, and Quality. Click here to view PYPL Ratings. Get all ENVA ratings here.

The Winner

The financial services industry is well-poised for robust growth and expansion thanks to solid demand amid growing consumers’ financial needs and the widespread adoption of emerging technologies. Further, a rising interest rate environment should bode well for financial services companies as it drives their profit margins.

Hence, prominent financial services providers PYPL and ENVA will likely benefit from the industry’s tailwinds. However, PYPL’s relatively bleak financials, elevated valuation, low profitability, and disappointing growth outlook make its competitor, ENVA, the better value buy now.

Our research shows that the 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.

What To Do Next?

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PYPL shares fell $57.34 (-100.00%) in premarket trading Thursday. Year-to-date, PYPL has declined -19.59%, versus a 12.61% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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