Everyone talks about the high-flying growth stocks or FAANG components. Somewhere along the way though, PayPal (NASDAQ:PYPL) just doesn’t seem to get the credit that it deserves. That’s even as PayPal stock has rallied 105% over the past 12 months and 510% over the past five years.
Think about that return for a minute, particularly the latter.
With a market capitalization of $260 billion and with PayPal stock hitting new all-time highs, it’s hard to say this name has been flying under the radar. But it has been nearly unstoppable.
Did you know that its five-year performance tops all of the FAANG components, the best of which is up “just” 380% in that span? Over the past 12 months, PayPal stock also wins, with the best FAANG component up just 86%. Let’s look at three reasons PayPal is a must-own name.
Dependable, High-Quality PayPal Stock
The fact that it has not only hung with FAANG but actually outperformed it should be all that investors need to know.
However, some investors have an issue chasing stocks that are up massively this year. The valuation simply boggles the mind, at times. While there is some merit to that, one has to understand that many trends have been accelerated by several years due to the novel coronavirus.
Those trends will not simply reverse once a vaccine is widely available. Consider what PayPal CEO Dan Schulman said at Goldman Sachs’ U.S. Financial Service Virtual Conference.
He reasoned that the coronavirus has shifted the digital payment space forward by “maybe three to five years.” In other words, the adoption rates and trends management was looking for in 2023 to 2025 is here now, today. Retail sales are shifting to online, a trend that a majority of retailers expects to continue, he added.
That’s music to PayPal’s ears.
Further, PayPal has a very solid balance sheet, with more than $14.1 billion in cash and equivalents. As one would expect, its assets (both total and current) easily top its liabilities.
While that’s great, it’s really the margin and cash flow that is impressive. The company has generated $4.34 billion in trailing free cash flow. That’s up from 2019, where PayPal generated $3.85 billion. It solidifies Schulman’s assessment of the digital payments space gaining momentum.
With trailing gross and net profit margins of 44.4% and 15.5%, investors can rest assured that a respectable portion of each dollar generated in revenue falls to the bottom line. It’s another reason PayPal stock has performed so well over the years.
Growth Inspires Gains
A big part of why PayPal has been such a big winner all these years is quite simple: growth.
Investors have come to depend on PayPal’s ability to generate steady yet above-average growth. At the end of the day, all investors really want to see is top- and bottom-line growth that translates to a rising stock price.
This year, consensus expectations call for 20.5% revenue growth and 22.5% earnings growth. In 2021, estimates call for 18.7% revenue growth and 18.9% earnings growth.
Considering that PayPal has beat earnings estimates in 19 of the past 20 quarters, perhaps estimates are even conservative. Either way, it doesn’t matter. PayPal continues to find ways to evolve, whether that’s through its traditional business, Venmo or crypto.
Now PYPL Is in Cryptocurrencies
That brings us to our final point, which is PayPal’s new growth leg.
Recently, the company announced its platform will allow customers to buy, sell and hold various cryptocurrencies. As of now, that includes bitcoin, ethereum, litecoin, and bitcoin cash.
The ability to buy and sell cryptocurrencies will, quite literally, allow PayPal to drum up revenue that wasn’t there before. That’s what has me thinking forward estimates may be conservative.
However, it’s not stopping at that. In 2021, the company will introduce the same benefit to its Venmo app. Further, PayPal will also:
Enable Cryptocurrency as a funding source for purchases in 2021, allowing users to use their Cryptocurrency holdings to make purchases at its network of more than 26 million merchants.
Once launched in 2021, when a consumer selects Cryptocurrency as the funding source, the Cryptocurrency will be instantly converted to fiat currency and the transaction will be settled with the PayPal merchants in fiat currency.
I am a crypto bull and as more companies like PayPal improve access to this asset, it and its users will be the beneficiaries.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.