With the markets in bear mode, the hardest hit stocks have been the growth plays. But for investors with a long-term focus, there are certainly some interesting opportunities popping up. Just look at PayPal Holdings Inc (NASDAQ:PYPL).
When the company reported its third-quarter results a couple weeks ago, the stock price spiked by 10%. But since then, there has been a steady erosion, with PayPal stock almost back to where it was before the earnings report!
Well, of course, very little has changed during this period of time — except for the rising pessimism of investors.
What Makes PayPal Stock a Buy
For the most part, it is a unique company that is positioned for the mega-trend of mobile payments. According to Statista, the global market is expected to jump from $450 billion in 2015 to over $1 trillion by 2019.
No doubt, PayPal is a pioneer of the space. And this is critical since it has allowed the company to build a strong brand that is backed with a solid infrastructure. But PYPL has also been savvy with its M&A activities, which has resulted in a diverse platform. The services are not just about allowing digital payments, but also merchant services, remittances to other countries, e-commerce payments and even extension of lines of credit.
Success in the payments business, though, is more than just about whiz-bang technology. There also needs to be a strategy to effectively manage the complex financial ecosystem. To this end, PYPL recently signed agreements with the mega credit card networks like Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA) to make it easier to process payments.
Interestingly enough, there was a fear that this would pressure margins because of the hefty fee structures, which have weighed on PayPal stock.
But so far, the fears have been overblown. If anything, it appears that there will be a negligible impact. It’s important to note that PYPL has tremendous economies of scale because the fixed costs tend to remain stable. But the company should also benefit from increased volumes from V and MA.
Yet the most important factor — which should be very encouraging for holders in PYPL stock — is that management is making decisions on what is best for its users. And it is obvious that they want to have seamless access to all the major payment options.
Something else: PYPL understands that a key to success with payments is to have ubiquity. So yes, the company has been aggressive in signing deals with large digital platforms, such as Alibaba Group Holding Ltd (NYSE:BABA), América Móvil and Facebook Inc (NASDAQ:FB). Again, the margins may not necessarily be standout. But hey, there is always a cost for getting access to large user bases.
Now when it comes to payments, the main adopters tend to be young. They are often called “mobile natives” since they were, well, essentially born with a smartphone!
The good news is that PYPL has been on this trend too with its breakout app, Venmo. It has really become the must-have payments option for the millennials, which are not an easy group to target. In the latest quarter, Venmo process $4.9 billion in volume, up a staggering 131% on a year-over-year basis. The run-rate is just shy of a $20 billion.
The Venmo app is steeped in social features, in which allows users to share information about their purchases. But PYPL has kept up the pace of innovation. For example, with Apple Inc.’s (NASDAQ:AAPL) iOS 10, users can now use Siri to send and request money from friends, or through the messaging app.
Bottom Line on PayPal Stock
Granted, PYPL faces tremendous competition. Just some of the rivals include tech operators like Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) and AAPL as well as financial giants, such as Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC) and JPMorgan Chase & Co. (NYSE:JPM).
But the growth ramp for PYPL hasn’t been dented. In the latest quarter, revenues jumped by 18% to $2.67 billion and the number of active customer accounts increased by 11% to 192 million. PYPL also continues to generate substantial amounts of cash flows, which came to $801 million in Q3.
Then again, the company has the benefit of focusing all its energies on the payments opportunity. And again, it is massive. Keep in mind that 85% of global transactions are still done with old-fashioned cash!
Besides, the payments industry is quickly becoming an everyday essential financial service. Because of this, PayPal stock is likely to represent an attractive buyout play for various large tech firms, whether FB, Amazon.com, Inc. (NASDAQ:AMZN) or Microsoft Corporation (NASDAQ:MSFT).
In other words, the recent dip in PayPal stock does look like a good entry point for investors who are looking for a way to get a piece of the lucrative mobile payments opportunity.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities, and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
