Square, Inc. (SQ - Get Rating) and Mastercard Incorporated (MA - Get Rating) are two of the world’s leading digital payment platforms. The pandemic has given a significant boost to digital payments. The rising number of coronavirus cases amid the holiday season will make people depend more on digital transactions. Being the dominant players in this industry, SQ and MA should witness a significant rise in their active users in the coming months.

Both stocks have generated significant returns over the past five years. While SQ returned 1,689.2% over this period, MA has gained 247.7%. In terms of year-to-date performance, SQ is a clear winner with a 240.4% return versus MA’s 14.3%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

SQ, on behalf of its Cash App, entered into a definitive agreement with Credit Karma to acquire its tax business, Credit Karma Tax on November 25^th. This acquisition should help it digitalize the tax filing process in line with the company’s aim to improve economic empowerment.

Last month, SQ launched its newest developer tool Terminal API at the fourth annual partner and developer conference, Square Unboxed. The company unveiled Square KDS on November 17th, which is a kitchen display system software that easily displays and organizes order tickets no matter where they’re placed. Last month, the company invested $50 million in Bitcoin.

MA acquired Finicity on November 19^th which is a leading North American provider of real-time access to financial data and insights. This is expected to be a step forward towards the potential of open banking. The company also continued to deliver on its multi-rail strategy with the addition of Account-to-Account (A2A) payments functionality to Mastercard Track Business Payment Service.

Last month, MA collaborated with GrainChain in order to meet the growing demand for transparency. Creating digital records of commodity data, this collaboration can empower suppliers and farmers, while reducing risks to buyers in the United States, Mexico, and Central America.

Amid growing demand for digitally-driven money management solutions, MA expanded its Digital First Card Program in North America partnering with payment processors including CoreCard, FIS, Fiserv, Galileo, i2c, Marqeta, PTS, and TSYS.

Recent Financial Results

SQ’s total revenue increased 139.6% year-over-year to $3.03 billion for the third quarter that ended September 2020, primarily driven by the appreciation of Bitcoin.

Bitcoin revenue increased 1,001.8% year-over-year to $1.63 billion. The number of average daily transacting active Cash App customers nearly doubled from the same period last year. Net income increased 24.2% year-over-year to $36.5 million. EPS increased by 36% year-over-year to $0.34.

MA’s net revenue increased 15.1% sequentially to $3.8 billion for the third quarter that ended September 2020. About 2.7 billion Mastercard and Maestrobranded cards were issued. Net income increased 6.5% sequentially to $1.5 billion. EPS increased by 17.6% sequentially to $1.60.

Past and Expected Financial Performance

SQ’s revenue grew at a CAGR of 55.1% over the past 3 years. The market expects the company’s revenue to increase 110.3% for the quarter ending March 2021, and 37.8% next year. SQ’s EPS is expected to grow 46.2% next year. Moreover, its EPS is expected to grow at a rate of 38% per annum over the next five years.

On the other hand, MA’s revenue grew at a CAGR of 9.3% over the past 3 years. The market expects the company’s revenue to increase 3.1% for the quarter ending March 2021, and 18.6% next year. The company’s EPS is expected to grow 29.9% next year. Moreover, MA’s EPS is expected to grow at a rate of 10.4% per annum over the next five years.

Thus, SQ has an edge over MA here.

Profitability

MA’s trailing-12-month revenue is 2.04 times what SQ generates. Moreover, MA is more profitable with a gross margin of 100% versus SQ’s 32.2%.

Also, MA’s ROE of 123.1% compares favorably with SQ’s 18.7%.

Valuation

In terms of forward P/E, SQ is currently trading at 276.11x, 414.3% more expensive than MA which is currently trading at 53.69x. Though SQ is less expensive in terms of trailing-12-month P/S (MA - Get Rating), its forward PEG of 6.84x is 123.5% higher than MA’s 3.06x.

In terms of trailing-12-month price/cash flow as well, SQ’s 298.18x is 596.7% higher than MA’s 42.80x.

Though SQ looks much more expensive compared to MA, it’s worth paying this premium considering SQ’s significantly higher earnings growth potential.

POWR Ratings

Both SQ and MA are rated “Strong Buy” in our proprietary POWR Ratings system. Here’s how the four components of the POWR Ratings are graded for SQ and MA:

SQ has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade and a “B” for Industry Rank. It is currently ranked #1 out of 236 stocks in the Financial Services (Enterprise) industry.

MA holds an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” for Peer Grade. It is currently ranked #2 out of 46 stocks in the Consumer Financial Services industry.

The Winner

Both SQ and MA are good bets considering their market dominance and continued expansion. However, SQ appears to be a better buy, despite trading at a higher valuation, because of its higher earnings growth potential.