PayPal and Square get buy ratings from Loop Capital. Here's the one two traders prefer

Two top digital payment plays are popping.

Shares of PayPal and Square closed nearly 2.5% and 3% higher on Tuesday, respectively, following a bullish call from Loop Capital Markets. The firm initiated coverage of both stocks with buy ratings, citing their recent outperformance and flagging "multi-faceted opportunity" in consumer and merchant markets as catalysts. Loop analysts wrote that PayPal was their "favorite name in our coverage universe."

PayPal is rated buy or overweight by nearly 84% of analysts with an average price target of $222, according to FactSet. The stock closed at $187.78 on Tuesday. Appetite for Square is more mixed, with about 43% of analysts rating it buy or overweight and an average $157.31 price target for the $155.59 stock.

With both stocks already up big this year — PayPal by almost 74% and Square by 148.5% — Loop has already missed a lot of the move, Mark Tepper, president and CEO of Strategic Wealth Partners, told CNBC's "Trading Nation" on Tuesday.

"The call seems to be a day late and a dollar short," Tepper said. "I feel like the easy money's already been made."

Even so, he remained bullish on the payment plays' long-term prospects, pointing to the rise of e-commerce, cashless payments and contactless transactions, all partially accelerated by consumers' psychological aversion to cash during the pandemic.

"Those trends are sticky," Tepper said. "Now, when it comes down to PayPal vs. Square, I prefer PayPal."

While Square may have more growth potential, the stock is "just too expensive" to justify buying at these levels, particularly considering the fact that 75% of its revenues still stem from in-store transactions, Tepper said.

"When I think of Square, I think of … the mom-and-pop shops that were hurt the most during this crisis" and other "banged-up" service businesses, he said. "I'd rather own the pure play on e-commerce — and e-commerce has almost doubled since the beginning of the crisis. And I also want the diversification of [business to business] and [business to consumer]. That's PayPal."

Tepper added that while he wishes his firm hadn't sold its position in PayPal on the stock's way up, it would need to fall into the $140s to consider getting back in.

"Look, this is going to be the first holiday shopping season during the pandemic and I think we all agree that most of that shopping's going to be done online. So, PayPal should do very well here," he said.

In the same "Trading Nation" interview, founder Todd Gordon agreed that PayPal was the better bet.

"To any viewers who don't have it, I like the pullback here and I actually would consider adding more," Gordon said, adding that a number of firms have raised their price targets on PayPal slightly in the last several weeks.

"If you want to take a look at the chart, we dropped below the 50-day moving average at 190, give or take, but the decline that we saw was only 19% compared to a 34% drop in early 2020, yet the [relative strength index] is retesting those support lows. That's encouraging," Gordon said.

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The index is a momentum indicator that tracks when a given stock is overbought or oversold. The above chart shows PayPal is more oversold than usual after its recent decline, which may signal the stock is headed for a bounce, according to Gordon.

"From a fundamental point of view, the sales and [earnings per share] are supposed to grow 20% next year," Gordon said. "So, PayPal's not just a Covid, work-at-home, stay-at-home name. They were increasing their payment volumes, which is a key indicator, even before Covid. They have a lot of fixed costs, so their free cash flow is free to grow to become a higher percent of their revenue. So, I like it."

Disclosure: Gordon owns shares of PayPal.


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