PayPal (NASDAQ:PYPL) slumped 2.76% last week with essentially all of that loss being accrued on Friday, a day of acute broader market weakness. Still, I think PayPal stock remains a viable option for investors looking to capitalize on fintech growth in 2020.
Recent weakness in the stock was the result of tepid guidance after the company forecast full-year earnings of $3.39-$3.46 per share, below the $3.49 analysts are expecting. PayPal forecast revenue of $20.8 billion to $21 billion.
Still, given PayPal’s penchant for modest per share earnings beats, seemingly on a quarterly basis, the initial consensus estimate remains in play. Venmo, PayPal’s person-to-person payments platform, and the company’s growing presence in China are among the catalysts on the PayPal slate in 2020. Morningstar, in a recent research note highlighted the importance of China with regards to the PayPal thesis, a market where it’s usually tough for foreign fintech firms to gain entry.
We believe that the Chinese government’s efforts to block entry of foreign competitors are receding and that local players have been granted a sufficient window to establish dominant positions that will be very difficult to disrupt. Still, even gaining a small amount of share in China could materially boost PayPal’s growth, and historically we think PayPal has shown itself to be adept in partnering with other companies in beneficial ways.”
PayPal’s China efforts are known among investors, but it’s still a growing part of the company’s vertical and one that offers significant opportunity.
“Third-party mobile payment transactions in China grew from 10% of GDP in 2014 to nearly 250% in 2019, compounding at a 107% annual growth rate,” according to a report by ARK Investment Management. “In ARK’s view, global mobile payments will be a multiple of today’s $87 trillion in global GDP.”
For investors that prize fintech for its U.S. possibilities, Venmo delivers on that front. It’s the most downloaded financial app in the U.S. Confirming that fintech is the future of finance, number four on that list is Square’s (NYSE:SQ) CashApp, which is likely to ascend into the third spot sometime this year. To be sure, this is a brewing rivalry.
At 33.44x forward earnings, PayPal isn’t a value stock, but price-to-earnings is a traditional valuation metric. ARK argues that digital wallet users aren’t valued at nearly the same level as retail bank customers. The firm estimates that each retail bank customer is worth $3,650 to that institution in the eyes of markets, but adds that markets only value Venmo users at $55 apiece.
That’s cheap when considering digital wallet customers could be valued at $800 billion by 2024. That $55 is cheap even if the $800 billion forecast turns out to be just half that.
Bottom Line on PayPal Stock
Both the financial services and retail industries are undergoing seismic shifts. Brick-and-mortar retailers are having their lunches eaten so severely by e-commerce that some are on the brink of or already have disappeared.
While fintech isn’t going to put large money center banks out of business, the PayPals and Squares of the world are forcing older rivals to spend large sums of capital to keep pace.
PayPal sits at the epicenter of these trends.
“Outside of the company, major trends continued to impact PayPal: e-commerce conducted on mobile devices in the United States accounted for just under 12 percent of all e-commerce transactions in 2014 and were forecast to rise to almost 45 percent by 2020, thus further changing how customers conducted business and paid for goods and services,” according to Harvard University.
If PayPal can continue its recent history of rising return on equity and keep margins steady or improve, it should remain in the upper tier of large-cap fintech names for the foreseeable future.
As of this writing, Todd Shriber did not own any of the aforementioned securities