In 2019, I was vocal on the idea that shares of online payments processor PayPal (NASDAQ:PYPL) were going to eclipse the $100 mark. They did, as PayPal stock rose from $80 at the end of 2018, to a high of $120 by mid-2019.
Now, in 2020, I’m going to sing a similar tune with a different price target. My thesis now is that PYPL stock will run to $150 at some point over the next 12 months.
Specifically, there will be four big catalysts which will push PayPal stock up to new highs in 2020.
First, the macro-backdrop will improve, with consumers increasing their online spending in an improving global economic environment. Second, the Honey acquisition will start to yield meaningfully large revenue synergies. Third, big-time global partnerships will expand PayPal’s reach and support sustained, large international growth. Fourth, product innovations at Venmo will accelerate PayPal’s leadership role in mobile commerce.
Those four favorable catalysts will converge on what is presently a discounted valuation for PYPL stock. With that combination, shares will ultimately surge higher over the next several months.
4 Big Catalysts for PayPal
As I mentioned already, there are four big catalysts on the horizon for PayPal stock. The sum of these motivators should support shares as they continue to move higher throughout the rest of the year.
First, the macro-consumer spending backdrop should improve. Concurrently easing global trade tensions and monetary policies have converged to dramatically improve the economic outlook in 2020. When the economic outlook is brighter, consumers tend to be more optimistic and are likely to spend more. This is especially true when they all have jobs, are all getting raises and all have big savings accounts; All of which is true today. Consequently, the consumer looks well-positioned to spend big in 2020.
Second, PayPal acquired deal-finding and shopping-rewards platform Honey for $4 billion in late 2019. This acquisition should start to yield meaningful revenue synergies in 2020. That is, Honey has the potential to augment PayPal usage in multiple ways, including sweetening the PayPal checkout value prop for consumers with lower prices by integrating Honey’s deal-finding and rewards programs. Furthermore, the investment will boost merchant engagement and spending by enabling PayPal’s network of merchant partners to offer targeted promotions through Honey.
Third, big-time partnerships will help support continued robust international growth. Of note, PayPal recently deepened its partnership with global Latin American e-commerce giant MercadoLibre (NASDAQ:MELI). This will help provide big enough tailwinds to offset potential domestic competition headwinds. In turn, PayPal’s overall growth trajectory remains stable in 2020.
Fourth, product innovations at Venmo will accelerate their leadership position in mobile commerce. The new additions include new personalized emojis from retailers and merchants, as well as a new Rewards program for Venmo Card users. That said, these will keep PYPL investors happy with progress on that front.
PayPal Stock Is Still Undervalued
Considering the four aforementioned growth catalysts and the secular digital commerce trends underpinning the company’s growth narrative, PYPL stock remains unreasonably discounted at current levels.
At the moment, PayPal is a steady growth giant; Quite simply because it is a giant and necessary component of a steady growth market. That is, everyone and their best friend is pivoting to online shopping (the steady growth part). That market doesn’t work unless consumers can pay for things online (the necessary part), and PayPal is one of the largest online checkout options in the world (the giant part).
That’s why for the past several years, PayPal has sustained around 25% to 30% total payment volume (TPV) growth in a global e-commerce market growing at a nearly 25% rate, according to eMarketer. E-commerce tailwinds are expected to slow with increasing scale, but remain robust at an average of around 16% growth rates over the next few years. Meanwhile, thanks to product innovations, global partnerships and synergistic acquisitions, PayPal should be able to sustain healthy share expansion in the e-commerce market, implying nearly 20% volume growth potential for PYPL over the next few years.
Alongside steady margin expansion (it’s tough to see expenses rising by anymore than 10% to 15% per year), this revenue growth paves a realistic pathway for earnings per share to hit $8.50 by 2025. More mature payment stocks, like Visa (NYSE:V) and Mastercard (NYSE:MA), normally trade at 25-times 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.
Bottom Line on PYPL Stock
The PayPal growth narrative will improve meaningfully in 2020. This is due to an increasingly favorable macro-economic backdrop, the late 2019 Honey acquisition starting to yield revenue synergies, a big-time partnership with MercadoLibre and multiple product innovations at Venmo. This improving growth narrative will converge on a relatively discounted valuation for PayPal stock. Ultimately, this convergence will result in shares soaring to $150 in the next five years.
As of this writing, Luke Lango was long PYPL.
