Investors in San Jose-based PayPal (NASDAQ:PYPL) stock, the pioneering global online payments company, have had a good year so far. In 2019, PayPal stock is up over 25%.
As the fintech competition continues to heat up, many investors are wondering how PYPL stock may fare in 2020. Although there may be some year-end volatility in broader stock markets, I’d be a buyer of PayPal shares at every dip.
With a market cap of over $124 billion, Paypal dominates the first-person digital payments sphere. When the company reported Q3 earnings on Oct 23, it beat across the board.
Revenue came at $4.38 billion, up from $3.68 billion from a year ago. It came in ahead of estimates for $4.35 billion.
The group reported net income of $462 million, or 39 cents a share, up from $436 million, or 36 cents a share, in the year-prior quarter.
Total payment volume (TPV) increased to $179 billion from $143 billion. The Street was expecting $177.4 billion. eBay (NASDAQ:EBAY) volume represented 8% of total TPV in the period.
The payments giant now has more than 295 million active users. Management expects to end 2019 with close to 305 million users.
Investors were encouraged by the fact that Q3 was the first time that the company processed more than 1 billion transactions per month over a quarter. I regard this stable growth of transactions as a crucial requirement for business development in a growth stock like PayPal.
Management also highlighted that it was the first foreign company to get a domestic payments license in China.
When the company released the results, the Street cheered the positive momentum and PYPL stock price surged.
PayPal Is a Digital Payments Leader
Technological developments have enabled the transformation of payment services. Research by Rory Van Loo of Boston University highlights that “technology challengers are providing digital alternatives to traditional financial institutions. PayPal and related startups transfer funds with the press of a button.”
And as a first-mover in the online payments area, PayPal has successfully seized quite an important chunk of the market for itself, becoming a fierce competitor to reckon with.
As a digital wallet, PayPal’s profitable business model depends on processing personal and merchant customer transactions on its global suite of payments platforms.
For many of its services, it has a business or pro suite where PYPL charges the account holder an extra amount. It also receives short-term interest from money kept as PayPal balances in customer accounts.
Therefore, to increase its user base in over 200 markets globally and thus its revenues, the company aims to integrate a plethora of payment systems.
PayPal is also building strong partnerships with other trusted brands. For example, it is collaborating with American Express (NYSE:AXP), Visa (NYSE:V) and Mastercard (NYSE:MA) whereby credit cardholders can use their “points” on the respective cards when they use PYPL to pay third-party merchants.
In its efforts to reach out to U.S. residents without digital payment methods, the company has partnered with Walmart (NYSE:WMT) to build in-store ATMs so that PayPal customers can withdraw cash at Walmart stores across the country.
Venmo and PYPL Stock
In 2013, when PayPal acquired Braintree, which specializes in payment systems for eCommerce ventures, it also became the owner of Venmo, a mobile payment app. Sending money electronically peer-to-peer with a few taps has taken off among U.S. consumers.
In this market that is expected to grow by double-digits in the next few years, Venmo has over 40 million users and is ahead of its closest competitors, i.e., Apple (NASDAQ:AAPL) Pay Cash, Square Inc’s (NYSE:SQ) Cash App, and Zelle, which is owned by Early Warning Services, a private fintech company.
According to recent research by Patrick McGuigan and Alan Eisner of Pace University, “Millennials are the primary customer demographics, but the appeal of peer-to-peer payment methods is rapidly expanding. [Venmo] was a first mover.”
The Venmo app currently processes roughly $300 million in payments each day. In October, PayPal also announced a Venmo credit card, expected to be issued in 2020.
CEO Dan Schulman highlighted that the company sees a bright future for Venmo, calling it “an incredibly powerful platform for engaging consumers.”
PayPal’s success has so far depended on innovation and acquisitions, made possible by its strong balance sheet and cash flow. And I expect this trend to continue in 2020, too.
For example, in late November, PayPal announced it was buying shopping and rewards platform Honey Science Corporation for $4 billion. Although it is too soon to know the exact effects of this purchase, it is likely to help PayPal expand its services’ reach, especially at the point of checkout.
A Closer Look at the Paypal Stock Price
Over the past year, PayPal stock is up 22%. However, the second half of the year, namely between July and late October has not been good for the share price.
On July 26, PYPL stock saw a 52-week high of $121.48. On Oct. 23, prior to the release of Q3 results, the shares saw a recent low of $94.77. The correction wave in PayPal stock price made the company’s fundamental metrics and multiples quite attractive.
Thus when the company reported robust Q3 earnings, PYPL shares rallied and on Dec. 2, reached a recent high of $108.49. Currently, the stock is hovering at around $106.
Due to the impressive run-up in the PYPL stock price since late October, short-term technical indicators have become somewhat overextended. Investors who pay attention to short-term oscillators should note that PayPal looks “overbought.”
So, in the coming days, there might be some profit-taking. It’s likely that a lot of good news has already been priced into the PYPL stock price.
I would not advocate bottom-picking in case of near-term price weakness. Yet, I find PayPal stock to be a compelling buy candidate as the price drops toward the $100 and even $95 levels.
Therefore, if you already own PYPL shares, you might want to hold your position and ride out any potential short-term decline. Or if you are an experienced investor in the options market, you may want to protect your portfolio with a covered call with about a two-month time horizon.
Ultimately, investors should always base their decisions on individual risk/return profiles.
The Bottom Line on PayPal Stock
It is likely that 2020 will make a new decade of growth for the digital payments market. And I expect PayPal to increase its presence on the web, in mobile app platforms, and in retail stores globally through organic growth, acquisitions and partnerships.
Thus its profitable business model and pro-active management will help the PYPL stock price reach new highs.
However, there might be some profit-taking around the corner, especially if tech and financial stocks continue to be volatile well into the new year.
If you do not yet hold the stock, you may want to wait several weeks, such as until the release of the next quarterly results, to buy into the stock. Then you could analyze if PayPal will be able to back up the current optimism with especially end-of-year payments volume and revenue data.
Within two to three years, investors who buy PayPal stock are likely to be rewarded handsomely.
As of this writing, the author did not hold a position in any of the aforementioned securities.
