The COVID-19 outbreak is driving big shifts in how consumers think about payments, and that’s affecting PayPal Holdings Inc. and Square Inc. differently.
Both companies highlighted March weakness in their earnings reports Wednesday, but their shares headed in opposite directions in after-hours trading, as only one of the two had an April for the record books.
PayPal PYPL, +2.29% Chief Executive Dan Schulman told MarketWatch that April “was probably the strongest month for PayPal” since it became a standalone public company in mid-2015. The company added 7.4 million net new active accounts in April, a monthly record. And the momentum has carried over to May thus far, as PayPal had its largest single day of transactions on May 1, topping previous Black Friday and Cyber Monday records.
“Our view is, we think we are hitting a tipping point across the world where people are seeing just how simple and easy it is to use digital payments to pay for services,” Schulman said on PayPal’s earnings call.
He sees some early indications that users are sticking to their new habits even as lockdown rules are eased. For example, users in Austria and Germany are still engaging with PayPal’s platform at “elevated” levels, up two to three times where they were before COVID-19, despite an easing of quarantine restrictions in those areas,.
E-commerce has been an area of strength across fintech earnings this season, and it’s been helping PayPal in recent weeks as its business is centered on digital payments, from online checkout buttons to peer-to-peer payments to international remittances.
“While there will be some short-run impacts, the long-term potential has been enhanced for the company as demonstrated by the significant increase in engagement PayPal has seen,” wrote Keefe, Bruyette, & Woods analyst Sanjay Sakhrani, who rates PayPal’s stock at outperform with a $120 target.
For Square SQ, +2.11%, the story is more complicated. The company benefited from digitally oriented services like the consumer-focused Cash App in the first quarter, but it’s taking time for Square to help transition merchants that traditionally relied on in-store sales over to online tools that can drive business during lockdowns.
Seller gross payment volume dropped 39% in April from a year earlier, though the company has seen “improving growth rates” since the middle of the month, according to Chief Financial Officer Amrita Ahuja. Weekly volume for Square’s online stores is up more than five times since the middle of March, and sellers in the retail and food verticals have been driving the greatest adoption of that service.
Card-not-present transactions make up 50% of Square’s total volume now, Ahuja said, up from about a third before the coronavirus pandemic hit.
Square is also seeing momentum in its Cash App, which bundles peer-to-peer payments, bitcoin and equities trading, and other consumer-facing services. Like PayPal, Square encouraged people to get their stimulus checks direct deposited into the app, which helped grow direct deposit volumes by three times from March to April.
Cash App users are now storing $1.3 billion in aggregate on the service. That’s key for Square, which is hoping that people will increasingly use their balances to make purchases with their associated Square debit cards, allowing Square to earn a cut of each transaction.
“We expect COVID to continue to weigh on Square’s business in the near-term, but otherwise applaud the company’s quick response to the crisis, and would expect Square to emerge from the pandemic in a position of strength,” wrote Barclays analyst Ramsey El-Assal, who has an overweight rating and $62 price target on Square’s stock.
Chief Executive Jack Dorsey also stressed that Square could come out of the crisis in a stronger place as it shows off its service to more merchants looking to drive “omnichannel” commerce, or shopping experiences that span different platforms.
“As we come out of this, we do believe that a lot of sellers are going to get creative and they’re not just going to be in the retail category or in the restaurants category or in the services category,” he said on Square’s earnings call. “They’re going to merge these things, and Square is the only one out there that actually covers all the verticals with all the critical tools to actually be creative and serve your customers in new ways.”
Square and PayPal are both interested in omnichannel commerce as they try to bolster their capabilities in what’s currently the other company’s strength. PayPal sees opportunities to capitalize on what seems to be a growing aversion to handling cash. The company is “accelerating our rollout of in-store capabilities as a result of that,” Schulman told MarketWatch.
PayPal shares rose 8.5% in after-hours trading, reversing initial declines after the company’s report came out. Square shares fell 4.2% in the extended session.
PayPal’s stock has increased 7% over the past three months, while Square’s has declined 13% and the S&P 500 SPX, -0.69% has lost 15%.