PayPal (NASDAQ:PYPL) stock has been a huge winner in 2020. The company has suffered only a modest negative impact from the novel coronavirus. And while the company has had to increase reserves for potential credit losses due to the virus, it’s made up for that and more with a huge surge in payments activity. As a result, its shares are up an astounding 39% year-to-date. And for anyone that bought at the March lows, PayPal has soared 76% since the bottom.
That said, the good news is that Paypal stock could have further to go still. That’s because PayPal is one of the best-positioned companies out there for dealing with the current economic environment. With the virus still a lingering threat, who wants to be handling grimy physical cash right now? Many transactions have moved online, and PayPal is there to facilitate them.
In the span of a few months, we’ve seen years worth of economic activity move into the digital realm — and PayPal is right at the heart of the action. That said, it gets even better. PayPal is seeing demand soar even while the credit card companies are witnessing declining volumes for a reason we’ll discuss in a moment.
Overall, PayPal is in the sweet spot, and its shareholders are reaping the benefits.
Leading The Contactless Retail Revolution
PayPal should be a huge beneficiary of post-coronavirus “contactless” retail practices. While contactless retail may seem like a simple phrase, it encompasses a ton of territory. You have traditional e-commerce, curbside pickup, cashier-less checkout in stores, in-app payments and more. The good news is that many of these options put PayPal on equal footing with the credit card networks. Therefore, plastic’s traditional monopoly on digital payments is breaking down.
Contactless retail is hardly just a U.S. phenomenon either. In the United Kingdom — for example — thanks to the coronavirus, a major card company raised the limits on transaction sizes for many contactless payments. For British pound-based commerce, the limit increased from 30 pounds to 50 pounds per transaction. Following the increased limit, the average contactless transaction size has jumped nearly 50%, to 14 pounds each, and the contactless channel is earning tremendous market share, picking up nearly half of purchases within that price range.
Of course, skeptics will say that this sort of uptake is happening primarily due to the crisis. And once it passes, people may return to their old ways. Some will, undoubtedly, but many won’t. And once people become accustomed to the ease of contactless payments, many shoppers will stick with it forever — thus increasing PayPal’s share of the overall ecosystem.
Overall, we can see this playing out in the company’s most recent operating results. During April, PayPal gained 7.4 million new accounts and grew processed payments 18%. Given the sharp overall drop in economic activity, these are staggering figures. The total commerce pie shrank dramatically during April, yet PayPal managed to produce strong double-digit growth.
This shows another advantage to PayPal, as it tends to be favored by younger and more online customers who have rising earnings power as they get older. Visa and Mastercard are undoubtedly great brands. However, some of their most profitable business is tied to established business customers who will be reining in spending for the foreseeable future.
Up until this crisis, Visa and Mastercard were widely viewed as the most powerful and entrenched payments companies out there. However, as PayPal gains market share, its valuation will continue to catch up with the credit card titans.
Paypal Stock Verdict
Simply put, PayPal is an innovative market force that will continue to lead. The company was already producing fantastic results before the current pandemic started, and what’s going on with the health crisis will be an unbelievable shot of adrenaline for the war on cash. Therefore, as long as people are being careful, PayPal will take more market share — not only from cash, but also from credit cards.
Yes, Paypal stock is rich. It is trading at 46 times forward earnings, and nearly 10 times revenues. Both of those are way up there, but it is deserving of its premium price. The company has grown its earnings at more than 30% a year compounded over the past five years, and analysts see 20% earnings per share (EPS) growth going forward. These are tremendous numbers in any environment, and especially so with the coronavirus-induced recession causing slowdowns for so many other leading companies.
Even the credit card companies have been showing signs of weakness thanks to the economic situation. Yet, Visa and Mastercard routinely trade for more than 30x earnings, and were trading for as much as 20x sales prior to the March market crash.
Collectively, PayPal doesn’t look bad at all by comparison, so don’t let its valuation scare you too much. The company’s fundamentals fully support a bullish outlook right now.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.