Many Americans still love their credit cards, but digital payment apps are gaining more acceptance. The Motley Fool's personal finance service The Ascent surveyed 2,000 Americans in 2023 and found that 28% trust digital payment methods more than using cash, debit, or credit cards. Nearly half trust digital payment apps as much as traditional payment methods.
These findings help explain why digital payment services from Apple (AAPL -1.08%) and PayPal (PYPL -0.14%) have grown considerably in recent years. Here's why these are great stocks to give you exposure to the burgeoning digital payments market.
1. Apple
Apple Pay has been around for nearly a decade, but it took several years to emerge as a contender in the digital payments market. Most Americans who use digital payment services still prefer PayPal or Block's Cash App, but there's an important reason why Apple could narrow the gap.
The younger the crowd, the more popular Apple Pay is. Only 16% of baby boomers use Apple Pay, but that percentage jumps to 31% among millennials (28 to 43 in 2024) and 47% among Gen Z (12 to 27).
It's becoming more common for even kids below 10 to have their own smartphone. Children are being introduced to the Apple brand earlier than ever before. This is a major advantage for the iPhone maker which is generating more revenue each year from apps and services. Apple Pay becomes a default payment method for these young users as they get older and gives the tech titan a bright future in the digital payments industry.
Apple Pay revenue is included in the company's services segment, which grew 16% year over year in the quarter ending in September and comprised one-fourth of Apple's total revenue.
In 2022, Apple Pay had an estimated 50.8 million users in the U.S., according to Insider Intelligence, and that is expected to reach 67 million by 2026.
Apple's ability to generate robust profits across products and services, as well as the brand power it has with younger generations, make it a no-brainer payment stock to consider in 2024.
2. PayPal
PayPal is by far the most popular digital payment service, with 85% of Americans saying it's their preferred app. With around 430 million consumer and merchant accounts, PayPal is a widely recognized brand. It processed $1.5 trillion worth of transactions in the third quarter and converted that volume into $7.4 billion of revenue, which grew 8% year over year.
Moreover, PayPal is further boosting its top-line expansion as customers continue to use their accounts more. This is having a nice impact on the bottom line, too. Higher payment volumes are driving leverage across PayPal's expenses, such as customer support, and boosting growth in adjusted earnings per share by 20% year over year in Q3.
The stock is still trading at a steep discount to its previous peak and is down 17% over the last year. PayPal is not expanding nearly as fast as during its pre-pandemic days when it averaged double-digit revenue growth every year. Wall Street has been concerned about increasing competition from the likes of Apple Pay, which could be contributing to PayPal's stagnant growth in active customer accounts.
However, PayPal is still profitably growing its business as transaction frequency with existing customers continues to rise. The discount in the share price could be a great buying opportunity for value seekers. PayPal still has value as the most trusted and widely used digital payment app. Investors can currently buy shares at a forward price-to-earnings ratio of 10.5, which could greatly undervalue this top fintech stock, especially if PayPal can resume customer account growth in 2024.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Block, and PayPal. The Motley Fool recommends the following options: short March 2024 $67.50 calls on PayPal. The Motley Fool has a disclosure policy.
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January 04, 2024 at 09:18PM
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Study: 28% of Americans Trust Digital Payment Apps More Than Cash or Cards. 2 Stocks That Tap Into That Popularity - The Motley Fool
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