The possibility of additional interest rate hikes is predicted to benefit the consumer financial services sector. Advances in technology, digitalization, and efficient loan approval procedures are projected to further elevate the industry, enriching its potential for expansion and advancement.

Considering this, I evaluated two consumer financial services stocks, PayPal Holdings, Inc. (PYPL) and Mastercard Incorporated (MA), to determine which could be a better pick for investors. Let’s understand this in detail.

Consumer financial services encompass a diverse spectrum of offerings tailored to individual and household needs. These services include current and savings accounts, online payment choices, credit and debit cards, mortgages, commercial loans, securitizations, and more, collectively addressing a wide array of financial requirements.

Increasing interest rates traditionally benefits financial organizations. Despite a welcomed decline from its peak, inflation persists at an excessive level. Federal Reserve Chair Jerome Powell advocates heightened vigilance against inflation, cautioning about potential forthcoming interest rate hikes.

He said, “We are prepared to raise rates further if appropriate, and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”

Furthermore, the consumer finance sector is being bolstered by the easy availability of diverse loans. Accessible through digital payment platforms, loans, and credits are generating additional and promising growth opportunities for the worldwide consumer finance market.

Innovatively, Artificial Intelligence (AI) tools are also reshaping the sector, optimizing risk management, fraud detection, compliance, and customer service. According to a report by Blue Weave Consulting, the global consumer finance market size is projected to grow at a CAGR of 7.1% and reach $1.96 trillion by 2029.

As a result, both PYPL and MA are expected to benefit from the industry’s tailwinds.

PYPL has plunged 16.1% over the past month compared to MA’s marginal gain. Also, PYPL has plummeted 16.8% over the past six months, compared to MA’s 14.1% rise during the same period.

Moreover, PYPL has declined 36.7% over the past year to close the last trading session at $61.19, while MA has surged by 16.9% during the same time frame to close the last trading session at $402.89.

But which stock could be a better financial pick? Let’s find out.

Recent Developments

On July 26, PYPL and Microsoft Corporation (MSFT) unveiled a strategic accord wherein MSFT would incorporate PYPL's Pay Later innovation across the United States, United Kingdom, Australia, Germany, France, Spain, and Italy. Additionally, U.S. consumers will soon be able to use Venmo for Microsoft Store payments. Such alliances are expected to elevate PYPL's growth and reputation.

On May 26, MA and UniCredit unveiled an expansive global payment partnership expansion. The strategy amalgamates UniCredit's collective strength of 13 banks with MA's card payment expertise, ensuring innovative payments and enriched digital experiences for customers while strategically enhancing MA's position.

Recent Financial Results

For the second quarter that ended June 30, 2023, PYPL’s non-GAAP operating income rose 19.8% year-over-year to $1.56 billion. Its non-GAAP net income and EPS grew 19.5% and 24.7% from the prior year’s period to $1.29 billion and $1.16, respectively. However, its adjusted free cash flow decreased 19.2% from the year-ago value to $869 million.

For the second quarter that ended June 30, 2023, MA’s adjusted net revenue increased 14.2% year-over-year to $6.27 billion. Its adjusted net income and adjusted EPS grew 9.8% and 12.9% from the prior year’s period to $2.74 billion and $2.89, respectively. Also, its cash inflow from operating activities came in at $4.62 billion, indicating an 8.9% year-over-year improvement.

Past And Expected Financial Performance

Over the past three years, PYPL’s revenue and EBITDA increased at a CAGR of 14.1% and 14.4%, respectively. Its net income and EPS grew at respective CAGRs of 16.4% and 18.1%. However, its levered free cash flow declined at a 6.2% CAGR during the same period.

Analysts expect PYPL’s revenue to increase 7.8% year-over-year to $29.67 billion for the fiscal year ending December 2023. Likewise, the company’s EPS for the current fiscal year is expected to rise 19.9% from the prior year to $4.95.

Over the past three years, MA’s revenue and EBITDA grew at a CAGR of 13.3% and 14.1%, respectively. Its net income and EPS grew at respective CAGRs of 11.8% and 13.9%. Moreover, its levered free cash flow increased at a 15.2% CAGR during the same time frame.

The consensus revenue estimate of $25.22 billion for the fiscal year ending December 2023 reflects a 13.4% year-over-year improvement. Moreover, the consensus EPS estimate of $12.16 for the ongoing year reflects a 14.2% rise year-over-year.

Valuation

In terms of forward non-GAAP PEG, PYPL is currently trading at 0.74x, 56.2% lower than MA, which is trading at 1.69x. Moreover, PYPL’s forward EV/Sales multiple of 2.31 is 85% lower than MA’s 15.40. Additionally, PYPL’s forward EV/EBITDA of 9.14x is 63.8% lower than MA’s 25.23x.

Profitability

PYPL’s trailing-12-month revenue is 1.2 times that of what MA generates. However, MA is more profitable, with a trailing-12-month ROCE of 172.79%, compared to PYPL’s 20.67%.

Additionally, MA’s trailing-12-month EBITDA margin and net income margin are 60.33% and 43.37%, respectively, compared to PYPL’s EBITDA margin of 19.24% and net income margin of 14.27%.

POWR Ratings

PYPL has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. Conversely, MA has an overall rating of B, translating to 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 C grade for Quality, in sync with its mixed profitability. Its trailing-12-month net income margin of 14.27% is 44.6% lower than the industry average of 25.77%, while its trailing-12-month ROTC of 9.52% is 68.1% higher than the 5.66% industry average.

On the contrary, MA has a B grade for Quality, justified by its higher-than-industry profitability. The stock’s trailing-12-month net income margin and ROTC of 43.37% and 40.17% are 68.3% and 609.4% higher than the industry average of 25.77% and 5.66%.

In addition, PYPL has a C grade for Stability, in sync with its 24-month beta of 1.54. On the other hand, MA has a B grade for Stability, justified by its 24-month beta of 0.96

Of the 50 stocks in the Consumer Financial Services industry, PYPL is ranked #19, while MA is ranked #3. 

Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Value, Sentiment, and Momentum. Click here to view PYPL’s ratings. Get all MA ratings here.

The Winner

Anticipated interest rate hikes stand to favor the consumer financial services sector. Technological strides, digitalization, and streamlined loan approvals are poised to amplify the industry's trajectory, enhancing its capacity for growth and progress.

Notably, robust consumer financial services stocks PYPL and MA are well-positioned to capitalize on these promising industry prospects. However, considering PYPL’s comparatively weaker financial performance and weaker profitability and stability, its competitor, MA, seems to be a better buy now.

Our research shows that the odds of success increase when one invests in stocks with an overall rating of Strong Buy. View all the top-rated stocks in the Consumer Financial Services industry here. 

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MA shares were trading at $407.14 per share on Monday morning, up $4.25 (+1.05%). Year-to-date, MA has gained 17.63%, versus a 16.73% rise in the benchmark S&P 500 index during the same period.

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.

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