After sprinting higher through the first seven months of 2019, shares of digital payments provider PayPal (NASDAQ:PYPL) have struggled over the past few months as slowing global economic conditions have converged on escalating trade tensions to create cause for concern with respect to PayPal’s growth trajectory over the next few quarters. Net-net, from its late July 2019 highs, PayPal stock has dropped more than 15%.
Time to buy the near term dip in a long term winner? I think so. For three big reasons.
First, PayPal is one of the more important players in the secular growth digital payments world, and as that world continues to grow over the next several years, PayPal’s revenues and profits will similarly march higher.
Second, Venmo, which is owned by PayPal, is in the early stages of monetizing its enormous user base, and Venmo revenue ramp over the next few years will provide a big tailwind for growth.
Third, considering its multi-faceted big growth drivers, PayPal stock is cheap here and now.
The investment implication? Buy PYPL stock here, at $100, before the market realizes the stock is too cheap for its own good.
PayPal Is a Secular Growth Company
The first big reason to buy PayPal stock is that PayPal is a secular growth company with tons of growth potential over the next few years.
Here’s the story. Cash payments are dead. Digital payments are the future. There’s nothing stopping this trend. Cash is inconvenient to carry around, easy to lose, and clunky. Alternative payment methods – like PayPal – are convenient to carry around (PayPal is in your phone), hard to lose (just don’t misplace your phone), and non-clunky (PayPal doesn’t take up any physical space).
Further, a ton of shopping is done through the digital channel these days, and you can’t pay with cash through the digital channel – you use a payment card or a digital payment account.
As such, digital payments constitute a very big, very important, and rapidly growing market. E-retail sales measured just over $2.9 trillion globally last year and project to grow at a 17% compounded annual growth rate into 2023. Of that $2.9 trillion pie, PayPal accounted for roughly 20% share in 2018, and given management’s guide for 2019 total payment volume, that share will likely rise by about 70 basis points in 2019.
The important takeaway? PayPal is expanding its market share in a 17% growth market. Assuming this share expansion persists as it should, given Venmo’s ramp (more on this later), PayPal reasonably projects as a 20%-plus revenue growth company over the next several years.
Meanwhile, operating margins are running higher at a consistent cadence of 50 to 100 basis points each year thanks to increased scale; this should continue, too.
Big picture, thanks to its favorable positioning in a secular growth market, PayPal projects as 20%-plus revenue growth company over the next few years with upside margin drivers.
Venmo’s Ramp Will Be Big
The second big reason to buy PayPal stock is that Venmo is in the first few innings of what projects to be a huge revenue ramp over the next several years.
I thoroughly believe that Venmo is the future of commerce. Let me explain why with a recent example. A colleague picked up bagels on the way to work on Friday morning. Five years ago, I would’ve whipped out my wallet, and paid him in cash. But, I don’t even own a wallet anymore – I use one of those phone-wallet cases – and I don’t carry cash.
So, what did I do? I paid him $10 through Venmo. He will get that Venmo payment, which he will either transfer to his bank (for which Venmo will take a 10% cut) or he will spend it with his Venmo card.
This is a microcosm for what is happening everywhere. P2P commerce used to be dominated by cash transactions. Now, no one carries cash anymore. So, P2P commerce is dominated by digital payments today. In the P2P digital payments world, Venmo is king, because they’ve invented a way to make P2P digital payments social, fun, and interactive. They also have scale, which helps, because it allows for uniformity and consistency.
Net-net, Venmo is a growth machine, and PayPal is just now turning on the revenue engines of that growth machine. Over the next several years, Venmo will turn into a meaningful revenue contributor for PayPal, and as it does, PayPal’s whole growth narrative will improve.
PayPal Stock Is Cheap
The third big reason to buy PayPal is that, given the company’s robust growth prospects over the next several years, PayPal stock is cheap here.
Here are the numbers. You have a $2.9 trillion global eCommerce market, growing at a 17% pace into 2023, and probably a 15% pace into 2025. PayPal owns 20% of that market. Share is expanding because of Venmo and P2P commerce ramp. This ramp will continue. So will PayPal’s market share expansion. Net net, by 2025, PayPal will likely own about 23-25% of the eCommerce market, which will probably stand around $8.5 trillion by then.
Doing the math on that, PayPal reasonably projects as a 15-17% revenue grower into 2025. Operating margins, which have been increasing at a cadence of roughly 50 to 100 basis points per year, should continue to march higher as the company benefits from scale and opex leverage. Thus, PayPal projects as a ~20% profit grower into 2025.
That pegs 2025 EPS at roughly $8.80. Based on a payments group average 25-times forward earnings multiple and 10% discount rate, that equates to a 2019 price target for PayPal stock of over $135 – way above today’s $100 price tag.
Bottom Line on PayPal Stock
Buy PayPal stock here. This is a secular growth stock trading at a significant discount to its long term growth prospects, with a big catalyst on the horizon from Venmo revenue ramp. Put those things together, and it’s clear to see why PYPL stock should work here.
As of this writing, Luke Lango was long PYPL.
