Forget Mastercard: Buy This Magnificent Payments Stock Instead

When it comes to the payments industry, Mastercard (NYSE: MA) and its larger rival Visa (NYSE: V) are two of investors' favorite stocks, and for good reason. The two companies have an essential duopoly on the payment processing industry, and both are extremely profitable businesses. In fact, Mastercard has produced a 46% net profit margin over the past four quarters.

However, if you're a value investor like I am, Visa and Mastercard might look a little too expensive. Even considering its dominance, and the fact that its earnings are steadily growing at a double-digit percentage each year, these aren't cheap stocks. Visa and Mastercard trade for 25 and 31 times forward earnings estimates, respectively, as of this writing.

A cheaper fintech stock

Like Mastercard and Visa, PayPal (NASDAQ: PYPL) is a highly profitable business in the payments space. But unlike those two, it trades for a rock-bottom valuation. As of this writing, PayPal trades for about 15 times forward earnings estimates, despite producing 17% year-over-year earnings growth in the latest quarter, expanding operating margins , and generally solid growth throughout the business.

PayPal trades for about 78% below its 2021 peak, and to be fair, there's a reason. The rapid user growth the company saw during the pandemic years quickly fizzled out in 2022, and growth stagnated. But the company has put the tools in place for a big turnaround.

Tons of potential

Over the past year or so, PayPal has undergone a massive leadership shift. It didn't just bring on a new CEO, although former Intuit executive Alex Chriss is doing a great job so far.

Rather, PayPal's entire C-suite is new. The new chief people officer formerly led talent strategies for Walmart , and the new CTO is also a former Walmart executive. The new EVP and general manager was formerly SoFi 's CFO. The new chief product officer was formerly President of Expedia Marketplace. These are just a few of the new hires the fintech giant has made. The point is that PayPal has put together an all-star team and everyone on the list has been in their roles for less than a year.

So far, Chriss and his team have been focusing on efficiency, smart capital allocation, and are rolling out some new innovations. And after a bit of a lull, both PayPal and Venmo are seeing steady active account growth in recent months. Chriss also announced that PayPal is going to start building an advertising business , which creates an interesting potential source of revenue growth.

For the full year, PayPal is expecting double-digit growth in adjusted earnings per share and about $6 billion in free cash flow , all of which management plans to spend on buybacks, indicating that leadership believes the stock is very cheap right now. It's not hard to see why, at less than 12 times free cash flow.

The bottom line

To be perfectly clear, I'm not saying that investors will necessarily go wrong with owning Mastercard or Visa, or both. They are excellent businesses and could deliver strong returns for years to come. But from a risk-return perspective, PayPal simply looks more attractive to me right now.

PayPal and Venmo are still two of the most widely used brands in personal finance, and their active user bases have proven to be quite sticky. If the company's new management team continues to allocate capital wisely and can manage to return the company to strong revenue growth, PayPal could be a massive home run for patient investors, especially given its rock-bottom valuation.

Matt Frankel has positions in PayPal and SoFi Technologies. The Motley Fool has positions in and recommends Intuit, Mastercard, PayPal, Visa, and Walmart. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard, short January 2025 $380 calls on Mastercard, and short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy .