Shares of digital payments processor PayPal Holdings (NASDAQ:PYPL) have had a strong 2019. Year-to-date, PayPal stock is up about 24%, as the company’s growth trajectory in the secular growth digital payments market hasn’t lost any steam.
But, there’s reason to believe that 2020 will be even better for PayPal. By that, I mean that PYPL stock has a visible opportunity to rally almost 50% next year.
What will drive this huge gain in the PYPL stock price? A few things. Namely, the core fundamentals underlying the payments processor will materially improve in 2020, which will drive sustained big volume, revenue, and profit growth. The shares aren’t priced for sustained big growth. Far from it. Instead, they’re priced for slowing growth.
This disconnect ultimately implies an opportunity heading into 2020. A close look at the numbers reveals that this opportunity is quite big. Like 50% big.
Favorable growth trends coupled with a discounted valuation should spark meaningful out-performance over the next 12 months.
PayPal’s Growth Trends Will Improve
Taking a step back, the secular growth drivers underlying PayPal stock remain vigorous. That is, everyone is still migrating from offline to online shopping, which is creating a surge in digital payment usage (and PayPal is a huge digital payment platform). At the same time, mobile commerce is still growing rapidly, sparking an even bigger surge in mobile payment usage (and PayPal-owned Venmo is a mammoth mobile payment platform).
Zooming back in, both of those drivers will gain momentum in 2020.
The global economy has been stuck in a synchronized slowdown for the last two years, thanks to escalating U.S.-China trade tensions and rising geopolitical uncertainty. Sure, consumer spending trends around the globe have remained strong despite this economic slowdown, mostly because global labor markets have remained healthy. But, consumer spending trends did slow in 2019. How could they not? The word “recession” was being thrown around every day in financial media. Naturally, the more consumers read about an impending recession, the less they spend.
These trends should persist into 2020. As they do, the e-commerce and mobile commerce shifts will gain momentum. That will provide an upward lift to PayPal and Venmo usage, and PayPal’s overall growth trajectory will accelerate higher
Still, PayPal Stock is Undervalued
Given the company’s improving growth trends heading into 2020, PayPal stock is dramatically undervalued at $100.
For the past several years, PayPal has sustained 25%-30% total payment volume (TPV) growth in a global e-commerce market growing at a ~25% rate, according to eMarketer. That e-commerce market is projected to slow to ~15% growth over the next several years, thanks to market saturation and tougher laps. PayPal should sustain share expansion in this market, thanks to its huge mobile commerce presence with Venmo. Consequently, PayPal reasonably projects as ~20% TPV grower for the foreseeable future.
Assuming steady take rates, that should flow into ~20% revenue growth. Gross margins should stabilize around the 45% range. Operating expenses should continue to rise at a ~10% rate, roughly in-line with how much they are rising today.
Putting all that together, PayPal going forward will be characterized by 20% revenue growth and sizable upside margin drivers. According to my modeling, that combination pegs the company’s 2025 earnings per share potential at roughly $8.50.
More mature payment stocks, like Visa (NYSE:V) and Mastercard (NYSE:MA), normally trade at 25x forward earnings. Based on that same exit multiple and a 10% annual discount rate, that equates to a 2020 price target for PayPal stock of nearly $150.
That’s 50% higher than where shares trade hands today.
Bottom Line on PYPL Stock
PYPL stock is a long-term winner trading at a huge discount to its long-term profit growth prospects, with big upside catalysts on the horizon. This combination ultimately positions the stock to have a big 2020.
As of this writing, Luke Lango was long PYPL.