By Philip van Doorn
PayPal and Square are well-known to investors as rapidly growing players in the payment-processing space. They don’t compete directly in all areas, but there are enough similarities to make a meaningful pairing.
Where PayPal and Square fit in
PayPal Holdings Inc. /zigman2/quotes/208054269/composite PYPL +1.59% was spun off from eBay Inc. /zigman2/quotes/204653455/composite EBAY +2.05% in July 2015. Square was founded in 2009 by CEO Jack Dorsey and James McKelvey Jr. (a current board member), and went public in November 2015. Dorsey also serves as CEO of Twitter Inc. /zigman2/quotes/203180645/composite TWTR +3.05% , which he co-founded in 2006.
PayPal said in its 2020 10-K filing with the Securities and Exchange Commission that 13% of its revenue for the year came from customers on eBay’s Marketplace platform. It also said that no other revenue source represented more than 10% of the whole.
PayPal makes it easy to do payments online through its secure digital wallet — a user simply signs into their PayPal account to make a payment to the merchant from a bank account or credit card. The purchaser doesn’t need to provide any financial information to the merchant.
During 2020, 93% of PayPal’s revenue came from transactions, with the rest from “other value-added services,” a category that has declined over the past two full years.
Square offers what it calls a “cohesive commerce ecosystem,” which includes hardware and software, to help merchants process point-of-sale transactions and online transactions. Square also has Cash App, which helps individual users, businesses and organizations transfer money or bitcoin /zigman2/quotes/31322028/realtime BTCUSD +12.55% through the app or by email.
“Customers can also use their stored funds to buy and sell bitcoin and equity investments within Cash App,” according to Square’s first-quarter 10-Q report (see page 42 of the report).
Here’s a comparison of quarterly and annual transaction volume for the two companies, with figures in millions:
PayPal has a much larger payment-processing business than Square, and recently, its quarterly and annual transaction volumes have grown more rapidly.
Size, revenue and profit
Here is a comparison of the companies’ market capitalizations and GAAP net revenue figures for the first quarters of 2021 and 2020:
GAAP stands for Generally Accepted Accounting Principles, under which Square’s revenue from its bitcoin holdings has caused the company’s total revenue to balloon. Here’s Square’s more detailed revenue breakdown:
This illustrates why an investor considering an individual stock has to take a closer look to form their own opinion.
Here’s what Square had to say about its revenue reporting in its first-quarter shareholder letter :
We deduct bitcoin revenue because our role is to facilitate customers’ access to bitcoin. When customers buy bitcoin through Cash App, we only apply a small margin to the market cost of bitcoin, which tends to be volatile and outside our control. Therefore, we believe bitcoin gross profit better reflects the economic benefits as well as our performance from these transactions.
More from Square’s shareholder letter:
While bitcoin revenue was $3.51 billion in the first quarter of 2021, up approximately 11x year over year, bitcoin gross profit was only $75 million, or approximately 2% of bitcoin revenue.