Red-hot digital payments processor PayPal Holdings Inc (NYSE:PYPL) has come under some weakness lately thanks to growing competition. Namely, PYPL stock has trended slightly down ever since Japan’s SoftBank announced plans to create their own global digital payments system.
For those who don’t know, SoftBank is no light competitor. Although this is their first notable foray into the digital payments world, the company has enough resources to acquire multiple existing players, tie them together under one conglomerate, and a create a globally viable digital payments system.
After all, this is what SoftBank did in the ride hailing business. They’ve taken large stakes in essentially every ride-hailing company in the world with geographic dominance. Now, as Quartz puts it, “SoftBank – not Uber – is the real king of ride-hailing”.
It is no wonder PYPL investors are spooked by SoftBank’s entry into digital payments. This is a company that can be a force for major disruption (or consolidation).
But I don’t think PYPL stock loses as a result of SoftBank’s push into digital payments. Here’s why.
Competition Is Nothing New for the Dominant PayPal
SoftBank is a big competitor. But this isn’t the first time a new wave of big competitors has challenged PayPal’s dominance in the digital payments space.
In late 2016, big banks in the U.S. made an aggressive push to dethrone PayPal. Specifically, they targeted Venmo, PayPal’s red-hot peer-to-peer mobile payment system. The writing was on the wall that payments were going cash-less. Gone were the days of cash and checks. Here were the days of digital payments.
So JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Wells Fargo & Co (NYSE:WFC) all dipped their toes into the digital payments water.
But nothing changed for PYPL stock.
In fact, things have gotten better.
Revenue growth has accelerated to above 20% from under 20% a year ago. Payment transaction growth was 26% last quarter, versus 24% a year ago. Total payment volume jumped 29% higher last quarter, versus 25% growth a year ago. Earnings soared 31% higher last quarter. In the same period one year ago, earnings were up just 14%.
Clearly, competition didn’t knock PYPL stock off its winning course last year. And it won’t happen this year, either.
PYPL has established itself as the go-to leader in the digital payments space. They are more than the market leader. They are embedded as a favorite option for consumers.
More than one out of every four consumers uses PayPal as their go-to digital payment transaction method. It is the second most popular digital payment transaction (first is credit cards).
On the mobile side, Venmo’s total payment volume nearly doubled last quarter. The mobile payments industry is a 20% growth industry. Clearly, Venmo is growing market share.
Considering its dominance in online and mobile payments, PYPL will remain the best way to play the digital payments boom, regardless of rising competition.
Valuation Is Reasonable
The only potential reason not to buy PYPL stock here is valuation, but even that argument is short-sighted.
If you look at this year’s estimates, PYPL stock does seem overvalued. It is trading at 45-times 2017 estimates for 21.5% compounded earnings growth into 2019.
That 100%-plus premium (45 divided 21.5) compares unfavorable to the S&P 500, which is trading at a 60% premium (22-times 2017 estimates for 14% compounded growth).
But if you look at next year’s estimates, PYPL actually looks undervalued. It is trading at 37-times 2018 estimates. Earnings growth from 2018 to 2019 is expected to be 22%, and considering the secular growth prospects in the digital payment industry, its unlikely growth comes down much in 2020.
Consequently, it is reasonable to say PayPal stock is trading at 37-times 2018 estimates for 20% compounded earnings growth potential from 2018 to 2020 (85% premium).
The S&P 500 is trading at nearly 19-times 2018 earnings estimate for what will likely be less than 10% compounded earnings growth potential form 2018 to 2020 (90% or higher premium).
All the sudden, when you start to consider just how big and long PYPL’s growth runway is, the stock starts to look cheap against the market.
Bottom Line on PYPL Stock
This remains a “buy on weakness” stock. PayPal will only head higher so long as the market remains strong.
As of this writing, Luke Lango was long PYPL.
