PayPal Stock is Still a Great Way to Play the Payments Revolution

Since late October, PayPal (NASDAQ:PYPL) stock has been on a nice uptrend. Consider that the price has gone from $97 to $120 — for a return of 24%.

PayPal Stock is Still a Great Way to Play the Payments Revolution

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Note that this return is no fluke. For the past three years, PayPal stock has averaged an annual gain of roughly 43%.

Even though the company has been around since 1998, it is still growing at a robust pace. In the latest quarter, revenue rose by 17% to $4.96 billion, which beat analysts’ expectations. PYPL also exceeded expectations for earnings per share.

Now it’s true that the guidance was kind of disappointing, especially on the bottom line. But this can be somewhat choppy anyway.

The fact is that the PayPal platform continues to attract large numbers of users. For 2019, there were 37.3 million net new active accounts for a total of 305 million, up 14%. The payment transactions also jumped by 25% to $12.4 billion and the total payment volume was $712 billion, up 23%.

A key growth driver: the hugely successful Venmo payments app, which has become a must-have for millennials. In the quarter, the payment volume surged by 56% to $29 billion.

And yes, PayPal is taking steps to monetize the platform. For example, the company announced a deal with Synchrony Financial (NYSE:SYF) and Visa (NYSE:V) to offer a credit card. There was also the announcement of a Venmo Rewards Program.

M&A Power

With a growing market cap and rising cash flows, PayPal has been leveraging its financial resources to pull off some savvy acquisitions. One was the $4 billion deal for Honey, which has a browser ad-on and app to help find e-commerce deals and promotions. At the time of the acquisition, the company had 17 million active monthly users.

For PayPal, Honey will help differentiate its payments services from rivals like Apple’s (NASDAQ:AAPL) Apple Pay. There should also be synergies with the merchant business (Honey has about 30,000 online retailers).

Next, PayPal acquired a 70% equity stake in GoPay, a Chinese-based payments processor. As a result, the California company will be the first foreign payments platform licensed in the world’s second-biggest economy. No doubt, this could represent a huge growth opportunity, given the massive population and the growing wealth and internet penetration.

PayPal estimates that online spending is expected to go from $1.5 trillion to $3 billion during the next four years and the number of users to swell to well over one billion.

But PayPal has been making other moves in China. To this end, the company has struck a deal with UnionPay, which will allow for the use of its credit cards with the PayPal wallet

Bottom Line on PayPal Stock

Granted, the payments market is getting intensely competitive. There are traditional financial institutions, like Bank of America (NYSE:BAC), that are making headway as well as many tech giants like Alphabet (NASDAQ:GOOGL). Yet the market is massive — and there is much room for  many players. More importantly, there is a secular trend for the use of digital payments, given the ubiquity of smartphones.

And even though the PayPal stock valuation is far from cheap, with the forward price-to-earnings ratio at 29x, it is still reasonable on a relative basis. Consider that Square (NYSE:SQ) is at 84x and even Mastercard (NYSE:MA) trades at 31x.

Given the growth and the set of strong assets, PayPal stock continues to be a good way to get exposure to the payments space.

Tom Taulli is the author of the book, Artificial Intelligence Basics: A Non-Technical IntroductionFollow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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