Shares of PayPal (NASDAQ:PYPL) continued on their torrid run higher in late April after the digital payments provider delivered first quarter numbers that broadly underscored the company’s healthy long term growth narrative. Investors were reassured that it remains the unchallenged leader in the secular growth digital payments market, and that the drivers pushing forward this company remain as vigorous as ever. Consequently, the PayPal stock charged higher.
This is nothing new for PYPL stock. Over the past several years, the growth narrative supporting PayPal has remained healthy, the numbers have remained robust, and the stock has remained on an upward trajectory. That’s why PYPL stock is up more than 200% over the past five years, versus a 40% gain for the S&P 500.
Over-performance in PYPL stock will persist. In the big picture, the same things that got PayPal here (i.e. a huge digital payment shift powering big revenue growth and steady margin expansion, against the backdrop of a stable global economy) will continue for the foreseeable future. As such, PYPL stock projects to remain on a winning trajectory for the next several years.
From a numbers perspective, fundamentals support upside in the stock to $125 in 2019. Thus, with PayPal stock trading around $110 today, upside over the next few months looks good.
Strong Q1 Numbers
PayPal just reported first quarter numbers. From an expectations standpoint, the numbers were mixed. First quarter profits beat. Revenues were in-line. The second quarter guide met on profits, but came in below for revenues. Meanwhile, the full-year revenue guide was in-line with expectations, and profits were guided above the consensus estimate.
In the big picture, though, quarterly beats/misses are just noise for PayPal. The bull thesis on PayPal stock boils down to two things. One, the digital payments shift is happening very quickly, and isn’t slowing. Two, PayPal is the face of that digital payments shift, without any major or worrisome competition.
As such, all investors need out of quarterly earnings is for the numbers to broadly confirm those two things. How? Continued robust revenue growth and healthy margin expansion. Across the board, PayPal delivered just that this quarter. See the important numbers below:
- Total Payment Volume growth of 25%. This marks the third quarter in a row of 25% TPV growth. TPV growth is expected to stabilize at this level, and come in at up ~25% for the full year, too. Thus, TPV growth has been, is, and remains stable north of 20%.
- Active Account growth of 17%. This marks the second consecutive quarter of 17% account growth. That 17% mark is up from 15% in the year-ago quarter and 10% in the two years ago quarter. Thus, account growth is accelerating higher despite tougher laps.
- Adjusted revenue growth came in right around 20% again and is expected to come in around 20% again this year. Thus, revenue growth remains stable around 20%.
- Operating margins expanded 10 basis points in the quarter, and are guided to keep expanding for the full year. Margins have been on a multi-year uptrend. This uptrend isn’t going to end anytime soon.
Overall, PayPal’s numbers underscored the obvious. The digital payments shift is alive and well, and PayPal remains king in that market. So long as those things remain true – and the valuation remains reasonable – PayPal stock will trend higher.
Fundamentals Support Upside to $125
Zooming out to the big picture, long term growth fundamentals create a visible pathway for PYPL stock to $125 in 2019. The key to the upside? Robust e-commerce growth, and PayPal maintaining its position as a digital payments leader.
In 2016, ecommerce accounted for less than 9% of global retail sales. Last year, the ecommerce penetration level reached nearly 12%. By 2021, eMarketer projects it will run towards 18%. And, assuming current secular trends persist, ecommerce will likely run towards 25% of total retail sales by 2025. Meanwhile, global retail sales are moving higher by a few percentage points every year given population growth, increased urbanization, and inflation.
Thus, the ecommerce market is one defined by rapidly rising share in a stable growth retail sales market. Ultimately, that combination positions ecommerce retail sales to grow at a healthy 15%-plus clip for the foreseeable future.
PayPal is at the center of that 15%-plus growth market. The more sales move to the digital channel, the more consumers will adopt digital payment methods. Of those digital payment methods, PayPal is among the most popular, and has maintained that title despite rising competition.
Consequently, as the commerce market grows at 15%-plus rate over the next several years, PayPal’s payment volume and revenues should rise at a similar 15%-plus pace.
A 15%-plus revenue growth rate, on top of gradual margin expansion, should reasonably drive PayPal’s EPS towards $8 by fiscal 2025. Payment processor stocks, like Visa (NYSE:V) and Mastercard (NYSE:MA), normally trade around 25 forward earnings. Based on that payment processor average 25 forward multiple, a reasonable fiscal 2024 price target for PYPL stock is $200. Discounted back by 10% per year, that equates to a 2019 price target of roughly $125.
Bottom Line on PayPal Stock
PayPal’s first quarter earnings report was mixed in terms of beating/missing Street expectations, but that’s largely irrelevant. What’s important is that through continued robust revenue growth and margin expansion the numbers underscore that the long term growth narrative supporting PYPL stock remains as healthy as ever.
So long as that remains true, PayPalstock will remain on a winning trajectory towards $125 in 2019.
As of this writing, Luke Lango was long PYPL.